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I am sorry to make this new thread but this topic is really confusing so i needed to ask you directly and clearly.
Question#1
Isn’t it true that the parent shareholders would be willing to pay more money for subsidiary is because of Goodwill. And this is the only reason and nothing else?Question#2
The Post-acquisition Profits will increase the overall value of subsidiary and subsequently the value of shares owned by the parent and NCI shareholders respectively?Questions#3
Isn’t it also true that the value of subsidiary is calculated by taking the net assets and then adding fair value adjustments to find out the true market value of subsidiaryQuestion#4
Isn’t it also true that the market value of subsidiary does subject to change or increase due to these following factors:i) Non-current assets revaluations
ii) Contingent liability
iii) Rights shares issue
iv) New shares issue @ premium
v) Intangible assets bought
vi) Business Partnership
vii) Research and Development initiatives
viii) Biddings / Takeovers
ix) Major business changesThese factors relates to subsidiary alone like subsidiary decides to issue rights shares or maybe new shares at premium etc.
Hi,
For the purpose of this exam I do believe that you are over thinking a lot of this and need to keep it as simple as possible.
Q1 – When the parent pays more than the fair value of the net assets of the subsidiary then this additional amount paid is the goodwill that is in the subsidiary.
Q2 – No, the post acquisition profits are an accounting entry in the financial statements and are not related to the market value of the subsidiary.
Q3 – No, the true market value of the subsidiary is the value of the shares traded on the market. All we are doing in the group accounts when consolidating is updating the book value of the subsidiary net assets to its fair value to more accurately represent the fair value (true value) of the net assets.
Q4 – The change in the market value/share price will change due to a variety of different factors.
Thanks
Thanks for your time. Could you clear one more time.
I agree with your point answered in (Q3) but you make a distinction here between the shares traded on stock market and the fair value of the net assets. Isn’t the true market value of the net assets is actually the true value of the subsidiary?
For instance if a subsidiary has net assets worth of $1m but the value of shares traded on market worth only $600,000 then which one is actually the true market value of a subsidiary?
Are you trying to say that the difference of $400,000 is actually the Goodwill?
Secondly, isn’t it true that the post-acquisition profits increase the value of shares owned by parent and NCI respectively. That is the reason we always add the post-acquisition profits in Group retained earnings and value of NCI calculations?
Thirdly, the factors that i mentioned above in last question is not correct to change the market value of a business, and in case of a subsidiary.
Thank you very much. I appreciate your help.
Hi,
The book value is not related to the market value of the shares. It never has been and never will be as they are two separate things entirely.
Goodwill is the difference between what we pay to acquire the subsidiary and the fair value of its net assets. The difference between the book value of equity and the market value is due to a variety of factors where the market believes that the shares are worth more. This could be due to the potential for new products, the strength of the market the business operates in for example.
No. The post acquisition profits increase the group retained earnings by the parent’s share of these post acquisition profits. Again, there is no link to the market value of the shares.
Thanks
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