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I understand the concept of PVs as I have just recently passed F9 in Sept Diet, but after watching and rewatching your lectures, I’m still not getting this ‘unwinding’ or ‘unrolled’ on the discount.
If P acquired 70% of S in Jan 20×1, and a deferred consideration was included to be paid in Jan 20×3, and we’re consolidating for year end Sep 20×2.
As at this consolidation date, P is 21 months closer to fully paying that deferred consideration, calculating the unwinding would therefore be 3/12 x the deferred consideration x the cost of capital?
That’s my understanding above, please further clarify as I’m not sure that even makes sense.
No, not 3/12
We unwind for the length of time that has PASSED as distinct from the period of time still to come
Assume $1,000 payable in 3 years’ time and cost of capital is 10%
The present value at the time of accounting for this deferred payment is therefore $750
One year later, that payment date is closer (by one year!) so we now need to adjust the present value of that $1,000 to a two year present value
Ie we unroll the discount. $750 * 1.10 = $825 and, to effect that adjustment we need to:
Dr Finance Charges 75
Cr Deferred Obligation 75A year later, the due date is now only one year away so the payment needs to be adjusted to just one year discounted value
So unroll the discount. $825 * 1.10 = $90.90 (ish) and, to effect that adjustment we need to:
Dr Finance Charges 82.5
Cr Deferred Obligation 82.5Is this getting any clearer?
The final year unrolling would be by $90.91 and that would increase the Deferred Obligation to $1,000 which is the amount that will now be paid
OK?
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