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CPA FR Direct Acquisitions Example 5.2 & 5.6 Webinar - YouTube
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hello everyone
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in this session we are going to be
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discussing direct acquisitions and i'll
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be looking at example 5.2 and 5.6 in the
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study guide
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now let's make a start
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so what are direct acquisitions direct
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acquisitions occur where a business
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acquires the assets and liabilities of
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another entity
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whereas indirect acquisition is where a
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business acquires the shares of another
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legal entity now at the end of this
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session i'll talk about why a business
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would choose direct acquisition over
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indirect acquisitions
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so this is the question that you have
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under example 5.2 and 5.6 assume that a
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limited acquired all the assets and
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liabilities of b limited which ran a
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store in a sought after location that
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ensured customers enjoy shopping there
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now we also told the fair values of uh
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the assets and liabilities of b
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uh and just remember these are at fair
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value uh and every time you do a
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business combination that's exactly what
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you want you want to look at the assets
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and liabilities at fair value now we
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also see here and i'll use a pen to
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highlight that
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that
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in addition a identified that b had a
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trademark with a fair value of a million
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not initially recognized in the balance
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sheet now that is very very important
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because at the time of a business
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combination uh the the entity that is
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being acquired it's it's in their
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interest to actually make sure that they
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they have comprehensively
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recognized all the assets and
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liabilities and a trademark is one of
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those assets that may potentially be
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missed out in the balance sheet and that
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needs to be recognized now we also told
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that a acquired the assets of b for
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eight million dollars in cash
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also customer satisfaction with b was
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extremely good now once you start
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hearing
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uh such a statement uh where customer
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loyalty is good or there is strong
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employee morale that is essentially
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starting to talk about goodwill that
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consequently it is very likely that this
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business will pay a consideration that
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is higher than the fair value of
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identifiable assets and liabilities so
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anyway the question is calculate the
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goodwill and show the journal entries in
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his book relating to the above
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transaction
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now it's very also very important to
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also remember that in a business
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combination when you are doing those
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calculations we normally concentrate or
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focus on the acquirer as opposed to the
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acquiring so in this case the acquirer
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is a their query is b
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so the first thing to do is to calculate
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the fair value of the total identifiable
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net assets this means the assets less
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the liabilities
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so when we do that we know that the the
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fair value of these assets um so
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accounts receivable is 400 000 inventory
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600 000 plant and equipment is 2 million
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london buildings is 7 million and so the
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total is 10 million dollars
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we then move on to look at that
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particular trademark that was initially
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not on the balance sheet because that is
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also an asset of nttb
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and so when we add that we get
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uh the total comes to 11 million and so
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we know now that the total assets is uh
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11 million dollars we then deduct the
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liabilities from that figure now the
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total liabilities is 5 million and
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consequently
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the fair value of total identifiable net
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assets is 6 million
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now i want you to
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to note the use of the word identifiable
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because entities or or companies or
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organizations also tend to have
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unidentifiable assets all liabilities
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now an identifiable assets that that is
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what is represented by goodwill
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so
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we therefore take the the consideration
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which is eight million now the question
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tells that tells us that a
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paid b eight million dollars as
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consideration uh so
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a paid eight million but we know that
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the net identifiable net assets is two
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million consequently goodwill is two
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million dollars what does goodwill
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represent it represents the reputation
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of the organization it represents the
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the the
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the things that you cannot be able to
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identify in the balance sheet but they
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actually exist so it could also be
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employee morale maybe the employee
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morale is quite high and so that is what
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you are also paying for as an acquirer
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over and above the identifiable assets
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and liabilities
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so then what are the journal entries now
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remember we are focusing on the acquirer
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and so what would actually happen on the
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balance sheet of the acquirer
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we are saying that
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essentially what will happen is the
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acquirer will recognize will increase
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the accounts receivable by 400 000 so
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the acquirer will already have some
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accounts receivable in their balance
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sheet and so they will increase that by
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400 000. they will do the same for
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inventory by 600 000 and the list goes
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on
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and so remember that they will also
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recognize goodwill at two million
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dollars so they'll not only recognize
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identifiable
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assets they will also recognize that
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unidentifiable asset referred to as
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goodwin so what's going to be on the
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credit side
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on the credit side they will also
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increase accounts payable by 500 000
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bank loan by 4.5 million
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and bank remember that a paid b 8
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million consequently the bank account
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will reduce or decrease by 8 million
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dollars so those are generally the the
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entries and so the effect of this is you
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will find that on the balance sheet of a
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assets will increase liabilities will
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increase and there will also be this new
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entry which is referred to as goodwill
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so
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why would an organization or a business
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choose direct acquisition over indirect
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acquisition why buy the assets and
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liabilities of another entity as opposed
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to just buying that entity maybe a
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hundred percent of the shares of that
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company or at least um buying a certain
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percentage it could be 70 acquiring
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control over that company
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the first reason is
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the the acquiring may be going bankrupt
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and the acquirer may only be interested
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in the assets and liabilities of that
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organization
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so you may find that the acquirer is not
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interested in trading in the name of
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their query and so in that particular
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case you will find that they will
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actually acquire the assets and
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liabilities and let that organization go
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bankrupt
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what's the other reason you might find
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that the aquarium has a negative
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reputation and consequently trading in
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the name of that acquiring may actually
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damage the reputation of the group and
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in such a case you will find that the
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the acquirer will only be interested in
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the assets and liabilities that form
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that business
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the next thing is you might find that
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the acquirer is only interested in
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certain assets and liabilities that form
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a business but they want to avoid
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certain liabilities potentially so this
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could be contingent liabilities as an
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example there could be a a case in the
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in in in the court in the court of law
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and uh the acquirer might be worried
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that
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the ruling might go against that
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acquiring and consequently they might
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just buy certain specific assets and
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also obviously uh inherit certain or
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acquire certain liabilities without
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acquiring that legal entity now just
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remember that when an organization
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acquires the shareholding of a legal
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entity they assume also
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any liabilities particularly contingent
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liabilities that might materialize
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so what's the other thing i'm talking
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about it's exactly what i've just spoken
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i've talked about now the issue of
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contingent liabilities there might be a
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a certain contingent liability that
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could be very detrimental to the
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acquirer and the acquirer wants to avoid
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that particular liability
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the final one there is that the acquirer
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may already have a very strong market
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share and reputation so it could be
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amazon or it could be a rio tinto or it
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could be a bhp and that organization
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might want to continue trading in that
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name so they might decide not to acquire
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the the the the
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acquiree or rather the legal entity and
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they might just want to acquire the
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assets and liabilities and continue
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trading in the name of the acquirer so
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that also is a good reason why an
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organization might choose a direct
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acquisition over an indirect acquisition
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so that brings us to the end of this
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webinar and i'm hoping that with that
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you are very familiar now with that
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concept of direct acquisition thank you
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