Noncontrolling Interests, Equity Interests And Divestitures

Question 1

What happens when you acquire a 30% stake in a company? Can you still use an accretion / dilution analysis?

Answer 1

Record this 30% as an ‘investment in Equity Interest” or ‘associate company’ on the assets side of the balance sheet, and you reduce cash to reflect the purchase
- can still use accretion/ dilution analysis, just make sure new net income reflects the 30% of the other company’s net income you are entitled to.

Question 2

What happens when you acquire a 70% stake in a company?

Answer 2

Go through normal PPA and create goodwill, but record a non controlling interest on the liabilities side for the portion you dont own.

Question 3

Example: You acquire 70% of another company using Cash. The company is worth $100, and has Assets of $180, Liabilities of $100, and Equity of $80

Answer 3

• assets up 180, other side 100
• 70 cash used, so assets up 110
• since 100% company worth 100, but equity 80, goodwill 20, assets 130
• then on liabilities need NCI of 30 to represent 30% not owned, both up 130 and balanced

Question 4

Let’s say that a company sells a subsidiary for $1000, paid for by the buyer in Cash. The buyer is acquiring $500 of Assets with the deal, but it’s assuming no Liabilities. Assume a 40% tax rate. What happens on the 3 statements after the sale?

Answer 4

IS: pre tax income up 500, net income up 300
CFS: Cash flow down 200, CFI up 1000, so cash up 800
BS: cash up 800, assets down 500, net income up 300 so match

Question 5

Now let’s say that we decide to buy 100% of another company’s subsidiary for $1000 in cash. This subsidiary has $500 in Assets and $300 in Liabilities, and we are acquiring all the Assets and assuming all the Liabilities. What happens on the statements immediately afterward?

Answer 5

IS: no change
CFS: CFI down 1000
BS: cash down 1000, assets up 500, goodwill 800, liabilities 300 so match.