Enjoyed this video? Then please subscribe to the channel, and let's take the next step in the mergers and acquisitions process: performing a due diligence th-cam.com/video/Ai3e9Hz8vpw/w-d-xo.html
3:57 question, a sale of 50% shares, if Jane's company would be listed, would mean that both her and the buyer will own part equal parts of the equity (and thus assets and liabilities) ?
Yes. The follow-up questions to that are: what was specifically agreed in the sale of 50% of the equity? Is it 50% of the economic ownership (the rights to future profits), then what about the voting rights, and the question of "control"? See also my video on th-cam.com/video/DTFD912ZJQg/w-d-xo.html
With every new video I’m liking this channel even more. The practical examples are a big differentiator from other channels. I want to become a member but there are several plans. Confused which one should I take. Kindly help.
Thank you very much, Shikhar! Each of the membership levels gives access to additional review/test polling questions and members-only videos. Personally, I would suggest the Admirer or Influencer levels, those give you access to livestreams/webinars. Next livestream scheduled for this Saturday (see the Community tab of the channel). P.S. Would you like to repeat your recommendation on Linked In? ;-)
Hi Vivian! These are discussed in my asset impairment video th-cam.com/video/lWMDdtHF4ZU/w-d-xo.html You can watch the whole video from start to finish, or skip forward to the sections that are most relevant for you by using the timestamps/chapters.
Always spot-on descriptions! Also, I loved the picture of the guy who has stopped shaving (illustrating P&G and Gillette's change of shaving market consumer trends)! Nice touch... where were you at when the picture was taken? :)
I’ll start by saying that I watched twice and enjoyed every moment, thank you i have Do 2 questions please : 1. When a company Announces goodwill impairment does it only happen in the books or does that money really go down somewhere? 2. There are pros or cons Why do companies report goodwill impairment after a few years and not in the same year? Thanks in advance philip
My video on asset impairment might be able to give a good understanding of what "impairment" means: th-cam.com/video/lWMDdtHF4ZU/w-d-xo.html If the carrying value or book value of an asset is higher than the recoverable amount of the asset, then the company should be recognizing an impairment loss. U.S. generally accepted accounting principles (GAAP) require companies to review their goodwill for impairment at least annually at a reporting unit level. Events that may trigger goodwill impairment include deterioration in economic conditions, increased competition, loss of key personnel, and regulatory action. To answer your specific questions, let's take an example where company A buys company B for $10B in cash, because company A believes there is a lot of value in making a business combination (synergies, etc.). Company A obviously has to convince both its own shareholders, as well as those of company B, that this is a good idea, and that $10B is a good price for everyone. Company B becomes a "business unit" (subsidiary) of company A. After careful analysis and valuation, the company's finance department (and its auditors) agree that the $10B is built up of $5 tangible net assets, $3B in intangible assets (patents, trademarks, etc.), and $2B in goodwill. At the point of finalizing the acquisition (after regulatory approval), company A pays the $10B in cash to the shareholders of company B in return for their shares. The accounting journal entry for this is: Debit tangible net assets $5B Debit intangible assets $3B Debit goodwill $2B Credit cash $10B (money leaving the company) All of the above are balance sheet accounts, there is no impact on the income statement (profit and loss statement). Goodwill is not amortized. If business unit B performs well financially, then this amount of goodwill will stay in place forever. Three years after the acquisition, the economic situation has deteriorated, and the acquired business is not doing well. Based on the impairment review, the company makes the judgment that these deteriorations are not just temporary, but will last for a longer time, and half of the goodwill needs to be impaired. Journal entry: Debit impairment loss $1B (income statement account) Credit goodwill $1B (balance sheet account) So as an answer to question 1: yes, this is recorded in the books, but no, there is no money being paid at this time, as this is a "non cash entry". The cash left company A when they bought company B (three years ago). A goodwill impairment is simply an adjustment of that valuation of goodwill, without cash changing hands. Goodwill impairments therefore hit the income statement as an expense, but have no effect on cash flow (in the CFOA section, the goodwill impairment amount is added back, i.e. neutralized). Five years after the acquisition, the business situation that business unit B is in, turns out to have deteriorated even more, and company A decides to write off the remaining amount of $1B of goodwill with the same journal entry as above. So the answer to question 2 is: how much goodwill impairment is recorded, and whether it is done in 1 step or over multiple years, depends on the (subjective) assessment of how badly the goodwill is impaired.
You're welcome!!! If only you had known how deep you would eventually get into accounting journal entries when you asked your first question. ;-) Please share with colleagues and friends!!!
@@TheFinanceStoryteller One of the reasons I ask you so many questions is because no one in my family or friends likes these topics and can no longer hear me :) I promise that everywhere I will try to spread your channel and as much as possible, you deserve it! Thank you
@@Erez.Levi.Stocks That's pretty much the same reason why I started this channel.... finding people to listen to me telling stories about business and finance. ;-)
What if company will stated, that they took long term loan to cover future purchase Goodwill then on balance against Goodwill will be Long Term Debt, right?
Yes, that could happen. If a company makes an acquisition, and finances the goodwill part of the purchase price with debt, the journal entry for the acquisition could be (I am making up an example): Debit Net assets assumed $2B Debit Goodwill $1B Debit Intangible assets $1B Credit Net liabilities assumed $1B Credit Cash $3B In the cash flow statement, this cash outflow will be represented in CFIA (Cash From Investing Activities). Prior to that, for the financing transaction: Debit Cash $1B Credit Long term debt $1B In the cash flow statement, this cash inflow will be represented in CFFA (Cash From Financing Activities). What I am trying to say here is that you cannot directly link an item on the left of the balance sheet like goodwill to a specific item on the right like long term debt.
Sorry to hear that. Can you be more specific on what you didn't like? Previous comments from others as well as like/dislike ratio are quite favorable, so would be interested to hear your viewpoint.
Enjoyed this video? Then please subscribe to the channel, and let's take the next step in the mergers and acquisitions process: performing a due diligence th-cam.com/video/Ai3e9Hz8vpw/w-d-xo.html
And this is why I follow this channel!! Excellent explanation, and to the point. I would love to see more vids on M&A.
Thank you very much, Matt! Supportive comments like this help me to keep going. :-)
Amazing stuff, I wonder why it takes hours of explanation in university, whereas you can get it all here short, to the point and clear!
Thank you! :-)
Because university is a business. They milk the shit out of you .
3:57 question, a sale of 50% shares, if Jane's company would be listed, would mean that both her and the buyer will own part equal parts of the equity (and thus assets and liabilities) ?
Yes. The follow-up questions to that are: what was specifically agreed in the sale of 50% of the equity? Is it 50% of the economic ownership (the rights to future profits), then what about the voting rights, and the question of "control"? See also my video on th-cam.com/video/DTFD912ZJQg/w-d-xo.html
With every new video I’m liking this channel even more. The practical examples are a big differentiator from other channels. I want to become a member but there are several plans. Confused which one should I take. Kindly help.
Thank you very much, Shikhar! Each of the membership levels gives access to additional review/test polling questions and members-only videos. Personally, I would suggest the Admirer or Influencer levels, those give you access to livestreams/webinars. Next livestream scheduled for this Saturday (see the Community tab of the channel). P.S. Would you like to repeat your recommendation on Linked In? ;-)
Sure. I’ll love to. Share the link please. Have subscribed for Admirer
Wonderful. Welcome!
Which video link could show and teach me about Fixed Asset Impairments? Thank you
Hi Vivian! These are discussed in my asset impairment video th-cam.com/video/lWMDdtHF4ZU/w-d-xo.html You can watch the whole video from start to finish, or skip forward to the sections that are most relevant for you by using the timestamps/chapters.
Always spot-on descriptions! Also, I loved the picture of the guy who has stopped shaving (illustrating P&G and Gillette's change of shaving market consumer trends)! Nice touch... where were you at when the picture was taken? :)
Thank you, Ben! :-) That was in Oslo Norway last summer. One of the best summer holiday trips ever!
The Finance Storyteller Ahhh Love Oslo! Hope all is well!
More specifically, the picture was taken at the wonderful Vigeland statue park! :-) Yes, doing well! Hope to connect with you soon.
I’ll start by saying that I watched twice and enjoyed every moment, thank you i have Do 2 questions please : 1. When a company Announces goodwill impairment does it only happen in the books or does that money really go down somewhere? 2. There are pros or cons Why do companies report goodwill impairment after a few years and not in the same year? Thanks in advance philip
My video on asset impairment might be able to give a good understanding of what "impairment" means: th-cam.com/video/lWMDdtHF4ZU/w-d-xo.html If the carrying value or book value of an asset is higher than the recoverable amount of the asset, then the company should be recognizing an impairment loss.
U.S. generally accepted accounting principles (GAAP) require companies to review their goodwill for impairment at least annually at a reporting unit level. Events that may trigger goodwill impairment include deterioration in economic conditions, increased competition, loss of key personnel, and regulatory action.
To answer your specific questions, let's take an example where company A buys company B for $10B in cash, because company A believes there is a lot of value in making a business combination (synergies, etc.). Company A obviously has to convince both its own shareholders, as well as those of company B, that this is a good idea, and that $10B is a good price for everyone. Company B becomes a "business unit" (subsidiary) of company A. After careful analysis and valuation, the company's finance department (and its auditors) agree that the $10B is built up of $5 tangible net assets, $3B in intangible assets (patents, trademarks, etc.), and $2B in goodwill. At the point of finalizing the acquisition (after regulatory approval), company A pays the $10B in cash to the shareholders of company B in return for their shares. The accounting journal entry for this is:
Debit tangible net assets $5B
Debit intangible assets $3B
Debit goodwill $2B
Credit cash $10B (money leaving the company)
All of the above are balance sheet accounts, there is no impact on the income statement (profit and loss statement). Goodwill is not amortized. If business unit B performs well financially, then this amount of goodwill will stay in place forever.
Three years after the acquisition, the economic situation has deteriorated, and the acquired business is not doing well. Based on the impairment review, the company makes the judgment that these deteriorations are not just temporary, but will last for a longer time, and half of the goodwill needs to be impaired. Journal entry:
Debit impairment loss $1B (income statement account)
Credit goodwill $1B (balance sheet account)
So as an answer to question 1: yes, this is recorded in the books, but no, there is no money being paid at this time, as this is a "non cash entry". The cash left company A when they bought company B (three years ago). A goodwill impairment is simply an adjustment of that valuation of goodwill, without cash changing hands. Goodwill impairments therefore hit the income statement as an expense, but have no effect on cash flow (in the CFOA section, the goodwill impairment amount is added back, i.e. neutralized).
Five years after the acquisition, the business situation that business unit B is in, turns out to have deteriorated even more, and company A decides to write off the remaining amount of $1B of goodwill with the same journal entry as above. So the answer to question 2 is: how much goodwill impairment is recorded, and whether it is done in 1 step or over multiple years, depends on the (subjective) assessment of how badly the goodwill is impaired.
@@TheFinanceStoryteller If I could do 1000 likes I would do, thank you very much for the full answer, I understood everything !!!!
You're welcome!!! If only you had known how deep you would eventually get into accounting journal entries when you asked your first question. ;-) Please share with colleagues and friends!!!
@@TheFinanceStoryteller One of the reasons I ask you so many questions is because no one in my family or friends likes these topics and can no longer hear me :)
I promise that everywhere I will try to spread your channel and as much as possible, you deserve it!
Thank you
@@Erez.Levi.Stocks That's pretty much the same reason why I started this channel.... finding people to listen to me telling stories about business and finance. ;-)
Good! Thank you!
Happy to help!!! I have related videos on due diligence, as well as goodwill accounting, if you are interested.
What if company will stated, that they took long term loan to cover future purchase Goodwill then on balance against Goodwill will be Long Term Debt, right?
Yes, that could happen. If a company makes an acquisition, and finances the goodwill part of the purchase price with debt, the journal entry for the acquisition could be (I am making up an example):
Debit Net assets assumed $2B
Debit Goodwill $1B
Debit Intangible assets $1B
Credit Net liabilities assumed $1B
Credit Cash $3B
In the cash flow statement, this cash outflow will be represented in CFIA (Cash From Investing Activities).
Prior to that, for the financing transaction:
Debit Cash $1B
Credit Long term debt $1B
In the cash flow statement, this cash inflow will be represented in CFFA (Cash From Financing Activities).
What I am trying to say here is that you cannot directly link an item on the left of the balance sheet like goodwill to a specific item on the right like long term debt.
@@TheFinanceStoryteller Big Thanks Philip.
Man your video is USD 1TRILLION deal!!!!!!!!!!! I am hungry for more deep down analysis.
Thank you very much, Jagadeesh!
Separate compliments for U4IA 😂👍🏻
thanks for wasting my time
Sorry to hear that. Can you be more specific on what you didn't like? Previous comments from others as well as like/dislike ratio are quite favorable, so would be interested to hear your viewpoint.