Question on associates

Barry

Hello everybody I wonder if someone can help

The question is this. A group has a 25%interest in a company's share capital of $100,000 and holds €100,000of convertable debt convertable into a variable number of shares which are valued at $110,000 and net assets are €1m and share price is 10. How would the cost of conversion be accounted for ?

This is not a real life example it's just a question I am looking at but can't grasp it.

Thanks in advance.

Steve Collings

Hi Barry

You seem to have dollars and euros going on in your question so I'm going to assume dollars for the answer.

The investor's interest in the associate is 25% of the net assets of $1m which is $250,000 plus the convertible debt of $100,000 - so the investor's total interest is $350,000 (this is before any conversion). You need to work out the increase in the investor's interest which you can do like this:

Variable number of equity shares of $110,000 divided by the share price of $10 = 11,000 extra shares taken up on conversion. Add this onto the investor's original shareholding of 25,000 which means the investor now owns (25,000 + 11,000) 36,000 shares in the associate. The associate's shares have also increased by the 11,000 extra shares resulting in issued share capital of (100,000 plus 11,000) = 111,000 shares. Therefore you can work out the investor's new holding by saying:

36,000 shares / 111,000 shares x 100 = 32.43% (previously 25%)

The investor's share of the net assets and goodwill after conversion comes to $350k which is made up of 32.43% of the net asets of $1,100,000 = $356,730. There is also negative goodwill arising on the increase in the investor's stake of $6,730 which is the difference between the convertible loan (consideration) of $100,000 and the additional share of the net assets of $106,730 which I have worked out as the diff between what the investor originally owned ($250k) and what they own now ($356,730).

That was a challenge for a Friday morning!!

Best wishes

Steve

Steve Collings

Steve Collings wrote: »

Hi Barry
The investor's share of the net assets and goodwill after conversion comes to $350k which is made up of 32.43% of the net asets of $1,100,000 = $356,730. There is also negative goodwill arising on the increase in the investor's stake of $6,730 which is the difference between the convertible loan (consideration) of $100,000 and the additional share of the net assets of $106,730 which I have worked out as the diff between what the investor originally owned ($250k) and what they own now ($356,730).

Sorry, I should have been a bit clearer when I said 'The investor's share of the net assets and goodwill after conversion comes to $350k'. You take the share of net assets of $356,730 and deduct the negative goodwill of $6,730.

Cheers
Steve

Barry

Thankyou Steve