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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.

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