Question

A Limited is considering purchasing 100% of the shares in B Limited.

Provide two (2) key reasons why A Limited may pay more than the fair value of the identifiable assets of B Limited and advise A Limited how the consolidation difference would be treated for accounting purposes.

Answer 1

There are few reasons why an acquirer pays more than the Fair value of the acquired i.e acquisition premium, these are:

An acquirer will typically pay an acquisition premium to close a deal and ward off competition.

An aquisition premium might be paid, too, if the acquirer believes that the synergy created from the merger or acquisition will be greater than the total cost of acquiring the target.

Predictable and reliable cash flows of the acquired, reduce the acquirer perception of risk, thereby increasing the purchase price.

Acquisition premium is recorded as goodwill on the acquirer’s balance sheet. Purchased goodwill is an intangible asset, which appears in the consolidated statement of financial position. Thus, A limited will treat it as Goodwill and report it in its Consolidated Financial Statements.