Net Identifiable Assets
In a business combination, net identifiable assets represent the subsidiary’s total assets minus its total liabilities. The fair value of net identifiable assets is compared with the fair value of purchase consideration and non-controlling interest, if any, to find out if any goodwill arises on acquisition.
When a company acquires another company or its total assets, the acquirer is called the parent and the acquiree is called subsidiary. The amount the parent pays to its subsidiary or its (previous) shareholders in the form of cash or stock is called purchase consideration. Where the parent doesn’t purchase 100% of the outstanding stock of the subsidiary, some portion of the subsidiary’s equity is held by outside investors, which is called non-controlling interest. The fair value of purchase consideration plus the fair value of the non-controlling interest represent the subsidiary’s total value.
In preparation of the consolidated financial statements, the parent must tabulate the assets and liabilities of the subsidiary recognized in the subsidiary’s books, identify assets which are not recognized in the subsidiary’s books such as intangible assets (brands, copyrights, etc.) and assign appropriate fair values to all assets and liabilities. Any excess of the sum of purchase consideration (including any contingent consideration) plus the fair value of non-controlling interest over the fair value of net identifiable assets is called goodwill.
At the time of acquisition, the parent must record the subsidiary’s assets and liabilities at their corresponding fair values and recognize any associated goodwill.
Example
Arthur Ltd. purchase John Ltd. by paying $140 million in cash. The following is an extract from John’s balance sheet just before acquisition date:
| Subsidiary's assets and liabilities | USD in million |
|---|---|
| Intangible assets | 20 |
| Fixed assets | 80 |
| Accumulated depreciation | (25) |
| Net fixed assets | 55 |
| Long-term investments | 25 |
| Inventories | 35 |
| Accounts receivable | 55 |
| Total assets | 190 |
| Long-term debt | 40 |
| Short-term debt | 15 |
| Accounts payable | 25 |
| Accrued expenses | 10 |
Given the information above, the assets and liabilities must be adjusted for the fair value changes as shown below:
| Subsidiary's assets and liabilities (USD in million) | Carrying Value | Adjustment | Fair Value |
|---|---|---|---|
| Intangible assets | 20 | + 10 | 30 |
| Fixed assets | 80 | ||
| Accumulated depreciation | (25) | ||
| Net fixed assets | 55 | + 15 | 70 |
| Long-term investments | 25 | + 5 | 30 |
| Inventories | 35 | -3 | 32 |
| Accounts receivable | 55 | -5 | 50 |
| Total assets | 190 | 212 | |
| Long-term debt | 40 | 40 | |
| Short-term debt | 15 | 15 | |
| Accounts payable | 25 | 25 | |
| Accrued expenses | 10 | 10 | |
| Net identifiable assets | 100 | 122 |
Goodwill in this acquisition amounts to $18 million (purchase consideration of $140 million minus fair value of net identifiable assets of $122 million).
by Obaidullah Jan, ACA, CFA and last modified on