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Hi everyone ,
Could you please advice , how should look like aquisition in the books of aquired company if consideration paid= Share capital +Retained earnings of company,and when control is gained ?
DR Cash
CR Retained EarningsThank you a lot in advance
And one more , what if acquired company has accumulated retained loss that exceeds share capital , basically company insolvent , how the consideration should be calculated e.g is there goodwill? I guess no then how to treat difference between price paid and net assets if equity has positive balance due to accumulated loss
Thank you
Ask yourself “To whom is the cash being paid when we acquire shares in another company giving us a new subsidiary?” Who actually receives the cash?
Answer that for me and we’ll go further if necessary
OK?
To the shareholders, thus no entries in aquired entity books unless we buy subsidiary from another company))
The last thing confuses me is how to treat acquisition of insolvent company as there are no net assets , will the consideration calculation be based solely on share capital value?
Thank You, Mike
How much would YOU pay for an insolvent company? It has negative assets – how much is it worth?
Answer that one for me and I’ll go to the next stage – if there is a next stage!
I suppose par value of issued shares should be paid or even with the discount .e.g. Share capital at par 100k$ , we have paid 70k$ with the discount , the difference may be treated as gain on bargain purchase?or such situation unrealistic?
Totally unrealistic!
Why would you buy the company? It’s worthless! It has no assets! Why would you want it?
(Where’s this “discount” suddenly appeared from?)
Imagine that you’re sitting down with other shareholders, all crying on each other’s shoulders lamenting your decision from years ago to invest in a company that is now insolvent. Your bright hopes for the future and the prospect of a stream of dividends and capital growth now turned into a nightmare where your entire investment has been wiped out. Do you see the picture?
Then along comes a knight on a big white horse and wearing shining armour and says to you all “Guys, don’t cry! I will buy your shares from you”
“Why?” you collectively ask
“Because I’m an eccentric and I have more money than sense”
Do you see the picture?
But there could be reasons behind the acquisition of the insolvent companies e.g. patents that it owns or it’s registered in the country with high entry barriers, or even the case of the bank bailouts while crisis , basically banks were going bankrupt but their shares were bought by the governments. Isn’t insolvent company company may have interesting items in the assets but they are just not enough to cover obligations, but still could be attractive taking into account that shares might be sold below par value (could they ?). And on the basis of what should be calculated such consideration ? pure share capital i guess?
You keep coming back to share capital. If the company has no assets, you won’t buy
If it does have undervalued assets, then the original premise that it is worthless has now gone!
So there ARE assets (at fair value). If that fair value is lower than (accumulated deficit on retained earnings less share capital) you still wouldn’t want to but the company
Only when the deficit balance on retained earnings is lower than share capital is it then worth buying the share capital and the sensible amount to pay (ignoring goodwill) would be the difference between share capital less the newly reduced deficit on retained earnings
May I ask why you are pursuing this?
Why insolvent company don’t have assets ? isn’t they are just not enough to cover obligations , but there are assets. This topic is particularly interesting for me as it’s hot topic in the countries within economic turmoil, which is now used frequently to buy companies in trouble for the petty cash, as insolvency may mean not only that company is unable to generate incomes ,rather it may be the sign of poor management and so on.
But i guess i got an idea
Thank you
But when you buy a company that is technically insolvent, sure, it may have assets. But you’re also buying the liabilities.
Yes, the company may be struggling because of poor management. So, very simply, why not start up your own company? Why pay money to be saddled with net liabilities?
But there may be unique assets (patents or researches) , not available if you create company from the scratch, isn’t it common thing for medium pharmaceutical companies that may have potentially very profitable researches but they balancing with liquidity and insolvency problems due to inability generate profits right here and right now.
Or i can imagine a realistic scenario for Eastern Europe with high level of corruption and in times of crisis , lets say building company got an approval from local government for the land in the center of the capital( what is close to mission impossible for “3rd parties” due to corruption bureaucracy) to build an apartment block, before the crisis, when the economic went down building company became just unable to acquire financing to finish project, moreover currency depreciation closed foreign money market as costs of such debt would be to high . So the company is left with huge liabilities and undervalued assets or if not undervalued than just not available for use to generate income right now.Isn’t it attractive for multinational company , to buy it on season sale-crisis , and realise the benefits in 5-7 years ?But that means that those assets DO have a fair value!
Listen Denys, whatever you pay to buy this company, net assets always equals shareholders’ funds
Now, whatever is the value of those net assets, that may be balanced by share capital with either a positive or a negative balance in retained earnings.
Whatever that net figure, that is compared with the amount that you pay. That could result in either positive or negative goodwill. It doesn’t matter how you view it – if it’s got undervalued assets, then you need to change the value by way of a fair value adjustment on consolidation
Your building plot in Eastern Europe (oh, how I love stereotyping!) has a fair value. So adjust for that fair value. The result may still be greater or less than the consideration to be paid. And that could lead to positive or negative goodwill
So what’s the issue?
The assets are undervalued in the example due to market conditions as at crisis all building industry is stuck , so they are already at FV. Yes , i understand that something should be balnced in the assets with Share capital , i’ve got it . But in theory could the consideration be les than shares price at par?
It’s not a stereotype)I’m from Eastern Europe)
Thank you ,Mike
And I’ve lived in Eastern Europe just up the road from you for 11 years so I know exactly what you are referring to 🙂
Is it possible to pay less than the par value of the shares? Yes, of course it is! Barings Bank (after Nick Leeson had finished with his derivative dealing and causing billions of losses to the bank) was sold, I believe, for $1
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