Negative Goodwill and Bargain Purchases in Merger Models

[@katielee8926]

OMMG Finallyyy! i found someone who normally explained how to account negative goodwill in consolidated statements ! i am so grateful

[@financialmodeling]

Thanks for watching!

[@alex_8704]

Thank you for this valuable tutorial

[@financialmodeling]

Thanks for watching!

[@mokusatsu8899]

3:26 Why does an extraordinary gain on the book income statement cause a deferred tax liability? Shouldn't it be a deferred tax asset? Your book taxes are higher than your real taxes, causing your book cash to be lower than your real cash, meaning you need an asset to make up the difference.

[@financialmodeling]

The Extraordinary Gain means the company's Book Pre-Tax Income and Book Taxes increase, so the company pays more in taxes, but in reality, Extraordinary Gains and Losses do not affect Cash Taxes. Therefore, you deduct the Extraordinary Gain on the Cash Tax schedule, which reduces Cash Taxable Income and Cash Taxes. Since Cash Taxes are less than Book Taxes, the DTA decreases or the DTL increases.

[@mokusatsu8899]

@@financialmodeling Interesting, so would that deferred tax liability stay there permanently? What line items in future years would reduce the DTL? It can't all be due to future depreciation, right?

[@financialmodeling]

@@mokusatsu8899 It may stay there indefinitely and then be written down when something else comes along to make Cash Taxes exceed Book Taxes. Plenty of DTLs do stay on the Balance Sheet indefinitely (e.g., ones associated with Indefinite-Lived Intangibles created in M&A deals). But you would usually record this change as a decrease in the DTA.

[@mokusatsu8899]

@@financialmodeling Ah okay, thank you so much!

[@TheMiniDUDU]

Helpful as per usual ! Thanks !

[@financialmodeling]

Thanks for watching!

[@sonerguney3225]

Super

[@financialmodeling]

Thanks for watching!

[@leowang2223]

Thank you for the post. I wonder for negative goodwill, how the journal entry would be for the acquired company? Do you need to enter any journal entry for the acquired?

[@financialmodeling]

Yes, you still add the acquired company's assets and liabilities on the Balance Sheet, and you still factor in write-ups, possible new DTLs, other reconciliations for deferred items, etc., all the usual entries.

[@gaurav2019]

Can you explain when the concept of EO comes into play in bargain purchase? I recently came across a bargain purchase transaction in my firm where a hospital was acquired at less than its book and fair value of assets. My manager’s view was that this is a case of EO, so we had the fixed assets (FA) of the target revalued at their post EO values which basically meant that the capital asset team revalued the FA to such a number where the total of FA + NWC reconciled with the purchase price paid (BEV) for the target. In short, we recorded zero goodwill and no intangibles while reducing the FA numbers. But I’m confused whether this method is correct or not and how the acquirer would actually record this in its books because we didn’t show any gain on bargain purchase in our valuation report. Thanks!

[@financialmodeling]

Sorry, not familiar with the topic, so I don't have an answer for you on that one.

[@yibinyang6956]

Thanks very much for the video, I was wondering do you have the video for how to evaluate Intellectual Property and PPA?

[@financialmodeling]

Not at this time.

[@jourdanh258]

Thanks for the tutorial! Should the bargain purchase gain be included in the accretion/dilution analysis as well?

[@financialmodeling]

If you're looking at GAAP accretion/dilution, yes, but you should exclude the bargain purchase gain in the Pro-Forma numbers (if you're calculating them).

[@naqibahmad3685]

Just want to ask. Let's say Company A acquire (100%) 500,000 unit of shares of Company B with consideration treansferred $500,000. The equity for Company B is 500,000 for Share Capital and Accumulated Losses for -$1,100,632. How to calculated their goodwill?

[@financialmodeling]

So, Company B's Shareholders' Equity is negative? If so, it's the same calculation as always... Equity Purchase Price minus Seller's Common Shareholders' Equity. $500,000 - ($500,000 - $1,100,632)

[@naqibahmad3685]

@@financialmodeling okay tq for the explaination. If got pre and post acquisition, how to calculate goodwill? Let's say from Accumulated Losses -$1,100,632, the pre acquisition losses are $400,000 and remaining amount is the post acquisition losses.

[@financialmodeling]

Sorry, I'm not sure what you're asking about. Goodwill is only calculated when an acquisition closes, so I don't know why you would need pre-acquisition and post-acquisition numbers.

[@deyolayeni7320]

How about bargain purchase of assets? Is that a thing, especially where intangible assets like customer list is sold in addition to PPE. Eg the net book value of a company’s asset is $700M. The assets were however purchased at $300m. Revaluation was not factored in this example, but the NEt book value is lower than the market value for those assets that was sold.

[@financialmodeling]

Yes, bargain purchases of assets can happen as well. The treatment is the same as the one shown here, record an Extraordinary Gain rather than creating Negative Goodwill.

[@deyolayeni7320]

Mergers & Inquisitions / Breaking Into Wall Street thank you

[@christopherfincham3870]

Do you have a similar video for how this would be done if it was an equity method investment? i.e Say $200,000 Cash paid for 30% investment in affiliate, whose Book Value of net assets is $525,000 but Fair Value assets is $750,000? Feels like there's negative goodwill there too, but struggling to get the journal entry.

[@financialmodeling]

It doesn't happen for equity method acquisitions because the other company's Common SH Equity is not written down, therefore there is no need to create Goodwill. In this scenario, you would Credit Cash for 30% * $200,000 and Debit Equity Investments for 30% * $200,000.

[@Bertztuful]

What is the point of creating NEW intangible assets(150 in the case) and how is their value determined ? Is it necessary to create them

[@financialmodeling]

Accounting rules require companies that complete acquisitions to re-value the seller's Balance Sheet and assign value to items like customer relationships, brand value, intellectual property, etc., that may not be listed explicitly on the seller's Balance Sheet. To value these properly, you would need a lot of information on all those points and you would have to estimate the future cash flows from those items. As a rough estimate, you can just make them a simple percentage of the purchase price based on similar, recent deals.

[@Bertztuful]

Mergers & Inquisitions / Breaking Into Wall Street thanksss !!

[@exonexoo3184]

which is better, gain on acquisition or acquition resulting to goodwill?

[@financialmodeling]

Depends completely on the context and company. You can't say for sure because some acquisitions work out, and others do not (see: Google / KZbin vs. AOL / Time Warner). Bargain purchases are so rare that it's almost hard to say anything useful with such limited data.