Allocation of excess of purchase price and reversal to expense

k.sankar.ra
Good Student
Posts: 14
Joined: Sat Mar 26, 2016 4:33 am

Allocation of excess of purchase price and reversal to expense

Postby k.sankar.ra » Tue May 31, 2016 2:03 pm

In page 19 of Edupristine CMA Part I Study Notes under Section A2, the following notes appear, i.e.,

"Investee's many assets and liabilities are based on historical cost THAT so many times THE investor's purchase price for the % of investee's net assets exceeds investee's pro-rata book value.
At the acquisition date : The excess of the purchase price over the pro-rata share of the investee's book value is allocated to the investee's identifiable assets and liabilities based on fair value and and ANY REMAINDER is considered as goodwill."

My Query 1
If the excess of the investor's total purchase price over the total of the investee's net asset book value,
is allocated based on the fair values of the individual assets and liabilities,
HOW WILL THERE BE ANY REMAINDER AT ALL ?

In page 19 of Edupristine CMA Part I Study Notes under Section A2, the following notes continue, i.e.,
"In subsequent periods : The investor recognizes EXPENSE based on the excess amount assigned to the investee's assets and liabilities,
and the expense recognized should be consistent with the investee's recognition of expense."

My Query 2
If the amount was earlier allocated to the individual assets and liabilities, why will the allocation be reversed to expense ?
The reversal being in the investor's books, why should such reversal accord with the investee's recognition of expense ?

Here, we are talking about investment to the extent of not > 50% of the investee's share capital,
since equity method is applied only in such cases and no consolidation applies in such cases,
as per paragraph 17 of APB Opinion 18 on Equity Method of Accounting on Common Stock Investments.

Can you clarify this please ?

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Allocation of excess of purchase price and reversal to expense

Postby edupristine » Wed Jun 01, 2016 12:18 pm

Hi Sankar,

You are right in saying that we are talking about the Equity method in which 20%-50% of the share is acquired, i.e. the Equity Method.

Query 1 - Why would there not be any excess at all ?? The text says that we need to allocate FIRST to the Investee's assets and liabilities Fair Value, which means the FV basis value of the assets and liabilities. It is not necessary that the FV of the assets and liabilities will be equal to the Purchase Price of the Investor. The very concept of Goodwill will fail if that starts happening always. So there is a difference in what you are inferring from the text and what it actually means. I would also request you to please go through the basics of goodwill concepts and get back to this topic again, because you need to have a strong grass route level understanding first.

Now the Query 2- The method of recognition of the expenses by the method the Investee recognizes the same is according to the US GAAP provisions. Also, the expenses/profits will decrease/increase the value of the value of the investment. That's what it is saying.

I am sure your hard work will pay off Sankar and thank you for sharing your research content with us on the topics for the other participants to read them but the way the notes are designed is from the idea of giving the reader a flavor of everything. The depth of every topic is covered keeping in mind the needs of the examination. The fact that a few topics are mentioned is to enhance the candidates knowledge on the subject. If the candidate is intrigued to know more of a particular topics then he is more than welcome to share his/her knowledge on the forum. i hope this clarifies all your queries that are in relation to the design of the content/notes ? Keeping in mind the same I hope you only post doubts that are specific to a concept and to gain further clarity on the same and NOT review our notes for us as this will cause unnecessary distractions on the forum.

All the very best for your preparation !! And please do keep writing to us in case of any concerns of queries.

k.sankar.ra
Good Student
Posts: 14
Joined: Sat Mar 26, 2016 4:33 am

Re: Allocation of excess of purchase price and reversal to expense

Postby k.sankar.ra » Fri Jun 03, 2016 5:59 am

Hi

You first need to delve deep into the queries raised, comprehend these aright, and then respond. You may get in touch with Sapna or Farzin in this aspect. I have established in my email to them both, that my queries as well as my sharing of my materials, were in good faith.

Even as you share what you know with me for a cost, I share what I come to know during the course of my,-
1) perusal of your study notes and Excel files for learning
the course material, and
2) independently working from an accounting
perspective on your problems and thus validating for
myself your solutuons, which by the way is my way
of,-
a) coming to terms with what I learn, and
b) responding to emails sent to me, for feedback on
the quality of lectures.

To wish somebody well, you need to have goodwill for that somebody. When you are defending yourself or your organization, you obviously fall short in that aspect.

I started posting my queries in the forum at the instance of Sapna.

I only review the materials that I study, with focus on the source of knowledge (and not on knowledge itself, and I gain comprehension by enlarging the reading base and not by reinforcing my memory).

Hence, my not comprehending the topic and my finding shortfalls, if any, in either of the 3 materials supplied by you to me, are a single activity. My doubts arise directly from such shortfalls and exist in and during the abidance of such shortfalls, which if you do see as a matter of fact, and putting aside your defensive prejudice, to be arising out of my lack of or incomplete comprehension, you may point out.

More from you than that, is outside your purview, at least in relation to myself.

Regards
Ra K Sankar


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