If we use the Aquisiton method (as opposed to the EQ method), that means we’d show higher asset level, and higher leverage, thereofre worse solvency ratios? Is this a true statement?
I have trouble wrapping my head around what happens (from a balance sheet entry perspective) when we use the AQ method. I know that under the Equity method, asset level doesn’t change because we pay say $10mil cash and start a new ‘investment in company A’ account on our balance sheet.
But what happens to asset level and equity level if we use aquisition? Is asset level siply higher by the amount of goodwill we calculate (I do know how to do that calc)? And is goodwill equity?
And sorry I know there are a lot of Qs here but- how does the investing company see higher debt on their balance sheet? Do we just literally add 20% of their debt to ours (if we buy 20% of that company))?
Works a problem. Fully consolidate an I/S and B/S and this will make more sense. You will see.
But what happens to asset level and equity level if we use aquisition? - Remember for an acquistion you consolidate ALL assets and liabilities of the investee but ignore the equity. The only change in equity would be due to minority interest.
Is asset level siply higher by the amount of goodwill we calculate (I do know how to do that calc)? - See above. You consolidate all the assets and liabilities and also calculate goodwill.
And is goodwill equity? - Don’t forget what you already know. You know the answer to this. You have passed lvl I and should know that goodwill is not equity…
And sorry I know there are a lot of Qs here but- how does the investing company see higher debt on their balance sheet? - Again see the above. Consolidate ALL liabilities
Do we just literally add 20% of their debt to ours (if we buy 20% of that company))? - NO!!! Again see the above. You consolidate ALL assets/liabilities regardless of how much you own under the acquisition. And likely if you are only buying 20% it would not be an acquisition because you would not have control. The amount of the subsidiary that you don’t own is settled through the minority interest.