We have covered this before, but this is a simpler and much clearer explanation of how merging accounting can distort equity values. As a backdrop, StarHub’s Group equity is about one-tenth of its Company equity. This gives rise to its >200% return on equity figure which does not allow for meaningful analysis.
Effects of Merger Accounting
Consider the following scenario (pay attention to the equity figures):
There are 2 entities prior to acquisition:
StarHub acquires SCV for 100 cash. After acquisition, the balance sheet for the respective entities will be:
If you need a detailed breakdown, the above is attributable to the following entries:
It is important to note that the equity of StarHub Group is not the sum of StarHub Company’s and SCV’s equity. There is also significant goodwill booked due to the negative equity of SCV.
After the goodwill write-off, the revised balance sheets will be as such:
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