Mid year acquisition

Ema, there are examples within the course notes. There are examples where I work through past exam questions within the “Revision lectures” pages on this F7 site

You’re asking a question that involves me typing out a lecture! That’s unreasonable.

Please, identify a particular point where you’re getting lost and I’ll help you but ….

….. in the case of a mid-year acquisition, we need to find the subsidiary’s retained earnings as at date of acquisition. Therefore, we need to time-apportion this year’s results.

If that’s not enough for you, then please identify a particular point that is worrying you

The time allocation of this year’s subsidiary profits takes place as early as working W2 Goodwill

We need to know the subsidiary fair valued net assets as at date of acquisition so that equals share capital + reserves at date of acquisition. Just concentrate for the moment on the subsidiary retained earnings figure

At the start of this current year there was an amount in the subsidiary retained earnings brought forward and, because we were not involved with the subsidiary at the start of the year, that brought forward figure is 100% pre-acquisition.

This year, though, we bought into the subsidiary so this year’s subsidiary profits need to be apportioned between the pre-acquisition period and the post-acquisition period.

The element that is pre-acquisition is included within the working W2 Goodwill calculation because that element of pre-acquisition profit is added on to the subsidiary’s retained earnings figure brought forward.

The post-acquisition element of this year’s subsidiary profits is the bit achieved by the subsidiary whilst under our control and we want to incorporate our share of those post-acquisition profits into the consolidated retained earnings figure

Is that any clearer?

“In this question Ret Earns of 6 months are taken I don’t get what have you done in that calculation It is written Like this (21000+2000/2)?” The domain name was recognised only with effect from date of acquisition so amortisation has been charged only with effect from that date. It had a fair value of 20 million and a 5 year life. Annual amortisation will be 4 million. But acquisition took place only half way through the year, so only half a year’s worth of amortisation will have been charged.

To find the annual profit before the amortisation, we need to add back that 2,000, then divide by two to get 6 months’ profits pre-acquisition of 11,500 and then deduct the 2,000 from the post-acquisition 11,500 to arrive at 9,500 post-acquisition

Better?

“Mini Question no 15
We take profit of post acquisition and that is added to retained earnings. But in this question we are taking pre acquisition profit. why?”

Sadly, you’ve misinterpreted the previous answers. We take the pre-acquisition element and add to retained earnings. It just so happens that in the previous examples the mid-year acquisition date was exactly half way through the year.

Think about those retained earnings! The full amount brought forward is pre-acquisition. But so too is the profits achieved in the pre-acquisition period. So it’s the PRE-acquisition profits that are added to retained earnings in the working W2 Goodwill calculation

You’re welcome

Hi,

Losses will reduce the retained earnings, and therefore the net assets. To get back to the net assets at the acquisition date these losses that have reduced the net assets will need to be added back to increase the net assets to what they previously were before the losses were incurred.

Thanks