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GAP in GAAP— Acquisition of a Company with a Negative Net Worth

Dolphy D’Souza
Consider Company X with assets of Rs. 120 and liabilities of Rs. 220, and consequently a negative net worth of Rs. 100, which comprises of accumulated losses of Rs. 120 and share capital of Rs. 20. Company Y acquires 51% shares of Company X, directly from promoters, for a consideration of Rs. 25. Accordingly, Company Y would recognize in the consolidated financial statements (CFS) a net liability of Rs100, goodwill of Rs. 76 and a negative minority interest (MI) of Rs. 49. The question is how does Company Y account for the negative MI of Rs. 49?

View 1: The negative MI of Rs. 49 is reduced againstthe parent’s reserves in the CFS.
The author believes that it may not be appropriate to record the unabsorbed losses on MI at the date of acquisition in the parent’s reserves in CFS. Recording unabsorbed minority losses in the parent’s reserves in CFS would carry a presumption that the parent always owned...

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