Comment, question or quotation of the day

24-01-2020 : Question asked on the vernimmen.com website

The presentation of the consolidated financial statements under IFRS by full consolidation modifies the structure of assets and liabilities, in particular shareholders' equity (SE) which is increased by the SE of the subsidiary company. However, when a company is acquired, the SE of the parent company remains unchanged in the consolidated accounts whereas the SE of the acquired company should have influenced them. How is this justified? It is normal, if the acquisition is financed without issuing equity but by new debt or by drawing on the buyer's cash balance, that the buyer's book equity does not change as a result of the acquisition financed in this way. Otherwise, a new way would have been found to create equity from scratch: nice but unrealistic. In fact, what we must see and not lose sight of is that if the first step in the process of full consolidation is to add the equity of the subsidiary acquired to that of the parent company, the second step is to subtract the purchase price of the shares of the new subsidiary from the equity of the parent company, in order to make them disappear from the consolidated balance sheet.  When the acquisition price and the book equity of the new subsidiary coincide, the group's equity is not modified.  The same applies when there is a difference that is resolved by goodwill; on this last point, see chapter 6 of Vernimmen.  Have a nice day.  

23-01-2020 : Quote of the day

“Egos, pay packets and jobs never shrink - it's the first law of investment banking”           Anonymous



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The Vernimmen.com Letter

Number 126 of January 2020

News : Report on the round table discussion on "Disenchantment with stock markets and the rise of unlisted investments"

Statistics : Typology of venture capital fund exits

Research : The effect of mergers on competitors, customers and suppliers

Q&A : What is a Term Loan B?

COMMENTS : Comments posted on Facebook