In page 19 of Edupristine Study Notes (Lines 7 to 9 from top) for CMA Part I, it reads as below :
"At the acquisition date : The excess of 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 the remainder is considered as goodwill".
Since the purchase price is the consideration for the investment in another entity, and no such reference to purchase price is made,-
a) either in APB Opinion 18 on Equity Method Accounting for Common Stock Investment,
b) or in SFAS 115 on Accounting for Investments in Securities,
it must necessarily be presumed to be in SFAS 141R on Business Combinations.
This is because APB Opinion 16 on Business Combinations has been nullified by paragraph E38 of SFAS 141R.
Only when there is an exchange of equity interests between the acquirer and the acquiree,
the acquisition-date fair value of the acquiree's interests is to be reckoned as per paragraph 35 of SFAS 141R.
Since the aforementioned 3 lines from page 19 of Edupristine study notes,-
a) refer to purchase price or consideration, not specifically stated to be discharged by acquirer's equity interests, and
b) refer to investee's identifiable assets and liabilities, and not to equity interests in investee,
the investee's book value standing for the acquiree's equity interests or its pro-rata share may NOT be said to apply to this case.
As per paragraph 20 of SFAS 141R, the identifiable assets and liabilities of the acquiree
acquired by the acquirer must be valued at acquisition-date fair values.
If the investor acquires a share of the investee (say 80%), should only 80% of the fair value
of the identifiable assets and liabilities of the acquiree be reckoned ?
That only pro-rata share (80%) of the identifiable assets and liabilities should be considered
has NOT been mentioned in paragraph 34(b) of SFAS 141R.
And, this position has been confirmed by Example 2 to SFAS 114R, reproduced below.
As you can see, although 80% is acquired, the entire value of assets and liabilities are accounted.
Since the consideration is $150, there is a gain on bargain purchase of $8.
If the consideration was only $140, there would have been a goodwill of $8.
Am I correct in saying so ? Can you clarify this position please ?
Are there other relevant applicable US GAAP pronouncements ?
Ra K Sankar
Extract from SFAS 141R:
Example 2: A Business Combination in Which the Consideration Transferred for
Less Than 100 Percent of the Equity Interests in the Acquiree
Is Less Than the Fair Value Received
A71. On January 1, 20X5, AC acquires 80 percent of the equity interests of
TC, a private entity, in exchange for cash of $150.
Because the former owners of TC needed to dispose of their investments in TC by a specified date,
they did not have sufficient time to market TC to multiple potential buyers.
The management of AC initially measures the separately recognizable
identifiable assets acquired and the liabilities assumed as of the acquisition date
in accordance with the requirements of this Statement.
The identifiable assets are measured at $250, and
the liabilities assumed are measured at $50.
AC engages an independent consultant who determines that
the fairvalue of the 20 percent non-controlling interest in TC is $42.
The amount of TC’s identifiable net assets ($200, calculated as $250 – $50)
exceeds the fair value of the consideration transferred
plus the fair value of the non-controlling interest in TC.
Therefore, AC reviews the procedures it used to identify and measure
the assets acquired and liabilities assumed and to measure the fair value of
both the non-controlling interest in TC and the consideration transferred.
After that review, AC decides that the procedures and resulting measures were appropriate.
AC measures the gain on its purchase of the 80 percent interest as follows:
Identifiable net assets acquired ($250 – $50) $200 Dr
Less: Fair value of the consideration transferred
for AC’s 80 percent interest in TC; $150 Cr
plus Fair value of non-controlling interest in TC $42 Cr
$192 Cr Sub-Total
Gain on bargain purchase of 80 percent interest $8 Cr
A72. AC would record its acquisition of TC in its consolidated financial statements as follows:
Identifiable assets acquired $250
Liabilities assumed $50
Gain on the bargain purchase $8
Equity—non-controlling interest in TC $42