{"id":21229,"date":"2019-11-13T00:18:00","date_gmt":"2019-11-13T05:18:00","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=21229"},"modified":"2024-09-11T07:06:30","modified_gmt":"2024-09-11T12:06:30","slug":"negative-goodwill","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/negative-goodwill\/","title":{"rendered":"Negative Goodwill and Bargain Purchases in Merger Models (16:09)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Negative Goodwill and Bargain Purchases in Merger Models<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/negative-goodwill\/#QUESTION\">QUESTION:<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/negative-goodwill\/#SHORT_ANSWER\">SHORT ANSWER:<\/a><\/li><\/ul><\/nav><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"QUESTION\"><\/span>QUESTION:<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>\u201cCan you explain what happens in an M&amp;A deal if the Equity Purchase Price is less than the seller\u2019s Common Shareholders\u2019 Equity?\u201d<\/p>\n<p>\u201cDo you get \u2018negative\u2019 Goodwill? What is the accounting treatment for this type of bargain purchase?\u201d<\/p>\n<h2><span class=\"ez-toc-section\" id=\"SHORT_ANSWER\"><\/span>SHORT ANSWER:<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>No, you never create \u201cnegative Goodwill\u201d because it cannot exist under either IFRS or U.S. GAAP. Instead, you take the absolute value of the Goodwill created and record it as an Extraordinary Gain on the Income Statement.<\/p>\n<p>You have to put a MAX(0 around the Goodwill calculation to do this. You reverse the Gain on the CFS and reverse the extra taxes the company paid on the Gain. On the Balance Sheet, Cash, Retained Earnings, and the DTL or DTA will be affected by these changes.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h3>Part 1: Why Bargain Purchases?<\/h3>\n<p>Bargain purchases are most common for distressed sellers, when the company is running out of Cash, has high Debt and other obligations, and needs to sell or liquidate quickly. A buyer who likes the seller\u2019s intangibles or other aspects of it might come in and offer a better-than-liquidation price that is still less than the seller\u2019s Common Shareholders\u2019 Equity.<\/p>\n<p>In our example here, Starbucks likes Coco Cream Donuts\u2019 brand, customer list, and intellectual property, but doesn\u2019t believe its Tangible Assets are worth all that much, so it allocates 60% of the Equity Purchase Price to those Intangibles.<\/p>\n<p>In the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/purchase-price-allocation\/\">purchase price allocation<\/a> process, it writes off the seller\u2019s Common Shareholders\u2019 Equity and Goodwill, adjusts its PP&amp;E and Intangibles, and creates a new DTL.<\/p>\n<p>Instead of recording negative $203 million of Goodwill, it records 0 and shows an Extraordinary Gain of $203 million on the combined Income Statement instead.<\/p>\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<h3>Part 2: Accounting Confusion, and a Simpler Method<\/h3>\n<p>Under the old method, you allocated the negative Goodwill proportionally to the acquired company\u2019s Assets until there was nothing left \u2013 and if some amount remained, you recorded that amount as an Extraordinary Gain.<\/p>\n<p>However, you no longer do this under U.S. GAAP or IFRS, and the rules changed a long time ago. You just record the Gain now.<\/p>\n<p>A simpler method for doing this is to simply Credit the Gain to the combined Shareholders\u2019 Equity in the Balance Sheet adjustments \u2013 the Balance Sheet will balance immediately after the deal takes place, and the setup is much simpler and easier to explain.<\/p>\n<h3>Part 3: Real-Life Example<\/h3>\n<p>Back in 2009, Westamerica Bancorporation paid almost nothing for Country Bank, even though its Net Assets were $48 million.<\/p>\n<p>The company recorded a Gain on Acquisition of $48 million on its Income Statement, reversed it on the Cash Flow Statement, and reversed the taxes on this Gain as well.<\/p>\n<p>These types of deals were common in the last financial crisis because there were so many distressed sellers that desperately needed to sell.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you\u2019ll learn about bargain purchases, the concept of \u201cnegative Goodwill,\u201d and what happens on the financial statements in a merger model when a buyer acquires a seller for an Equity Purchase Price less than the seller\u2019s Common Shareholders\u2019 Equity.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-21229","biws_kb","type-biws_kb","status-publish","hentry","kb_category-ma-and-merger-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/21229","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=21229"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}