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Hi all!
I have a business case that I can't solve and was hoping to pick your brains
On 31 March 2020, Company A acquired 100% of the share capital of Company B. The cost of the acquisition was $10m and was paid in cash. Company B's net assets on the date of acquisition consisted of $5m in Accounts Receivables only, it had no other assets or liabilities. Goodwill of $5m was recognised as of that date.
I am looking at the Consolidating Cash Flow Statement for Q1 2020 from Q1 2020, and I see following:
My question is: why is 'Acquisition of Business' not $10m? Is the above treatment of the acquisition of Company B in the Consolidating Cash Flow Statement for Q1 2020 incorrect and not in compliance with US GAAP?
I would intuitively assume that this is considered a business acquisition, however this article by CFI and some others made me wonder whether that is correct:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/consolidation-method/
Some sources on the web seem to suggest that this transaction would be recorded as a business acquisition only if the company B would no longer exist, but would be "incorporated" into Company A. However, I could not find anything related to this in GAAP, so I am not sure.
Any thoughts?
I have a business case that I can't solve and was hoping to pick your brains
On 31 March 2020, Company A acquired 100% of the share capital of Company B. The cost of the acquisition was $10m and was paid in cash. Company B's net assets on the date of acquisition consisted of $5m in Accounts Receivables only, it had no other assets or liabilities. Goodwill of $5m was recognised as of that date.
I am looking at the Consolidating Cash Flow Statement for Q1 2020 from Q1 2020, and I see following:
| all data in $000 | Company A | Company B |
|---|---|---|
| Accounts Receivable,net | -$5,000 | -- |
| Investments in Subsidiaries | -$10,000 | $10,000 |
| Acquisition of Business, net of cash acquired | -- | -- |
| NET CASH FLOW FROM INVESTMENT ACTIVITIES | -$10,000 | $5,000 |
My question is: why is 'Acquisition of Business' not $10m? Is the above treatment of the acquisition of Company B in the Consolidating Cash Flow Statement for Q1 2020 incorrect and not in compliance with US GAAP?
I would intuitively assume that this is considered a business acquisition, however this article by CFI and some others made me wonder whether that is correct:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/consolidation-method/
Some sources on the web seem to suggest that this transaction would be recorded as a business acquisition only if the company B would no longer exist, but would be "incorporated" into Company A. However, I could not find anything related to this in GAAP, so I am not sure.
Any thoughts?