What Accounting Issues Arise When Accounting for Partial Disposals and Acquisitions?

Today's business environment is very competitive. Companies buy and sell off other business ventures to maintain their competitive advantage. These transactions are referred to as mergers and acquisitions. The management of a company may decide to sell off its venture wholly, or just a part of it. Partial disposal of a merger or acquisition can present significant challenges in terms of recording the transactions. The following discussion outlines these challenges for all start-up managers to help you gain an understanding:

Retained Investments

Partial disposal involves merger and acquisition transactions where the parent company retains some control of the firm they are selling. Retained interest and control means that the selling company still has some monetary investments in the firm being disposed of. Ideally, accountants must record the retained investment at its fair value after careful consideration of things like depreciation and amortisation. However, mergers and acquisition standards have an ambiguous definition of retained investments.

Take a case where a parent company disposes of a subsidiary that has been paying a premium rental charge of one thousand dollars every month, which is well below the market value on the material date of the disposal. After the sale, the parent firm receives the payment for the portion of the subsidiary being sold. The parent company will thus receive a smaller amount of rental premium in the future depending on how much interest they still control in the subsidiary. Ideally, accounting entries will account for the immediate gain or loss, but they cannot cater to the long-term economic implications of the reduced premiums on the operations of the parent company.

Valuation Problems

Companies have different methods for valuing their assets. Particularly, using different methods to provide for depreciation of the assets of the parent and subsidiary companies means that one of them has to compromise during the deal and incur some losses for the successful partial disposal of a subsidiary. Additionally, note that values used for depreciation and amortisation are estimates rather than absolutes. In a real sense, it is hard for the parent company to receive the right amount of consideration based on the value of assets.

Some Aspects Are Indivisible

Another problem also arises because some assets and liabilities cannot be divided or valued in terms of money. Services offered by the human resources, such as their level of expertise, experience, dedication and creativity in the workplace, cannot be expressed as money. However, the partial disposal of a subsidiary means that the parent company will realise changes in the level of productivity. Although accountants can use performance metrics such as sales volumes to show these changes, these metrics cannot reflect the actual gain or loss accruing to the parent company or disposed subsidiary.

For more information, contact a qualified accountant in your area.