In the proportional method, we take into account only the percentage stake of assets or the liabilities of the target company. If we own 80 percent stake in the target company, we will only add 80 percent asset/liabilities of the target company to the acquirer’s company. When the acquirer company stake is 100 percent in the target company then this method will be equivalent to purchase method, because then there won’t be NCI even in purchase method.
NCI represents the stake own by minority shareholders, since in proportional method we don’t add 100 percent stake in the target company to the acquirer company, NCI doesn’t get created.
If we own 80 percent stake then we will only add 80 percent of assets/liabilities unlike purchase method where we would have added 100 percent of assets/liabilities and to account for 20 percent we would have been required to put NCI.
No NCI in proportional method
Proportional Method (Book Value)
Companies | P | S |
Asset | 500 | 100 |
Liabilities | 100 | 20 |
O.E | 400 | 80 |
TOTAL | 500 | 100 |
Fair Value of Assets: 120 ( Given)
Fair Value of Liabilities: 20 ( Given)
Net Asset value of S ( Book Value) Assets - Liabilities) | 80 |
Net Asset Value of S ( Fair Value) | 100 |
P acquires 80 percent of S for Rs. 100
Goodwill = Price paid – 80 percent of S
= 100 - .8*100 (previous slide)
= 20
Consolidated Assets:
Asset of acquirer company – Cash we are paying to acquire Target Company + fair value of the asset in the Target Company + Goodwill
Consolidated Liabilities:
Liabilities of Acquirer Company + fair value of the stake in the liabilities of Target Company
Consolidated Owner’s Equity:
Owner’s Equity of Acquirer Company
Companies | P | S | Fair Value of S | Proportional B.S |
Asset | 500 | 100 | 120 | 500-100 + .8*120 + goodwill = 516 |
Liabilities | 100 | 20 | 20 | 100 + .8 *20 = 116 |
O.E | 400 | 80 | | 400 |
TOTAL | 500 | 100 | | 516 |
In the next blog, we will look into equity method of consolidation. It will be used when the acquirer company holds equity stake between 20 percent and 50 percent in the target company.
