[alexpaj]

Passed the exam first time with 55% as a self study student. I must say though that this was one of the harder papers I took and was the one I was most worried about.

I generally do better on the calculation papers, so P4 was an absolute joy to study last year and I got a good mark. When studying P5, however, I never really felt 100% comfortable. I did three hours a day, five days a week for two months to prepare. Didn’t read the text book, just did the Kaplan revision kit questions. Despite this I still felt unprepared on exam day. The problem with exams like this is that it’s hard to judge how well you have done when marking your answer. Advice of this forum did really help though with people stressing to apply the models to the scenarios.

[alexpaj]

Hi John,

In the first part of the question we use the FCF to find the equity value of the target company.

In the second part, to calculate the increase in value of the share price, we need to calculate the value of the combined company. Why for this part of the question do we switch to a P/E valuation method of a company? Why are we not continuing on with a FCF analysis of the combined company?

Are there particular scenarios where it would be best to use FCF and other scenarios where we should automatically assume to use P/E valuation?

Thanks in advance!

[alexpaj]

Hi John,

In this question when calculating the free cash flow of Fodder Co, the operating profit is after operating costs and tax allowable depreciation.

For free cash flow does this tax allowable depreciation not have to be added back after tax has been calculated.

It seems they didn’t do this in the answer.

Thanks in advance,

Alex

[alexpaj]

Hi John,

Could you please explain why we don’t discount the 35 million? If the cost is incurred in 2 years time should it not be discounted by 1/1.11^2 (cost of capital)?

Thanks!

[alexpaj]

Hi Mike,

Hi Mike,

All the examples I’ve seen so far regarding fair value difference of inventory at acquisition has been cases where all of the inventory in question was sold by year end.

In the case above, if some of the inventory was left over at year end then would the adjustment be as follows??

Dr Retained Earnings
Cr Inventory

i.e. If 50% of that inventory was left:
Dr Retained Earnings 10k
Cr Inventory 10k

Thanks in advance!

Alex

[alexpaj]

Hi Mike.

Thank you very much for your explanation!

When the sub accounts for the impairment the NCI will also take a share of the impairment loss right? Meaning only the parents share of the profits will be “hit”. So does this mean that on acquisition the NCI will also get a share of the gain on goodwill?

Thanks

[alexpaj]

Ahh. Again my apologies. I’m still getting to grips with all the terminology.

I understand at acquisition we value all the assets and liabilities of the sub at fair value. Hence in the original question, although the sub hasn’t recognised the impairment, for the acquisition we therefore must recognise the impairment for fair value purposes. Hence the impairment has an effect on goodwill as you said.

I’m also aware that all changes to the acquired assets and liabilities, and the resulting gains and losses, that arise after control of the acquired entity has passed to the acquirer are reported as part of the post acquisition financial performance of the group.

My question is just that since we already accounted for the impairment at acquisition, if later on down the line the sub accounts for the impairment in their financial statements do we reverse the impairment treatment in the consolidated accounts since we already accounted for it at acquisition? Otherwise it seems like double counting.

Again apologies for not explaining my thinking clearly in previous posts.

[alexpaj]

Hi Mike.

Sorry for my stupidity there! Haha. I think in my mind I was getting confused with impairment of cash generating areas where we charge goodwill first.

So after initial recognition, if the sub decides to recognize impairment of the building it will be recognized in the consolidated financial statements by debiting retained earnings?

Thanks,

[alexpaj]

Hello Mike,

Just a further question with regards to the property revaluation in (i). I understand that the sub is not recognising the property revaluation, therefore there is no charge to the RE in terms of the amount written off, but rather instead the revaluation changes our calculation of goodwill, increasing our goodwill by the amount written off, 1.2 mil.

My question is, hypothetically, in the future if the sub decides to go ahead and do a revaluation of their property and writes off 1.2 mil on the property, then in the consolidated statement of financial position would this be charged against our goodwill instead of retained earnings?

It would seem unfair to charge against RE seeing as we already accounted for the revaluation at the point of acquisition by incorporating it into our goodwill calculation.

Thanks.

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