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Ok… so would I be expected to use annuity depreciation in this question then?
Having thought about it overnight as well, surely I would need to deduct the depreciation from the NPV cash flow to turn it into profit (as ROI uses profits rather than cash flows, and cash flows are all I have to work with)?
And final question – if I am not supposed to use annuity depreciation (not something that’s been covered in my course as far as I am aware…) then would it really be reasonable to expect an ROI of 350%?!
I understand that as the capital invested decreases the ROI will rise, but I can’t understand why this question would expect such a high ROI which is why I’m so confused by it..
Ok, it was question 2 from the specimen exam paper:
When a parent is evaluating the assets of a potential subsidiary, certain intangible assets can be recognised separately from goodwill, even though they have not been recognised in the subsidiary’s own statement of financial position.
Which of the following is an example of an intangible asset of the subsidiary which may be recognised separately from goodwill when preparing consolidated financial statements?
A A new research project which the subsidiary has correctly expensed to profit or loss but the directors of the parent have reliably assessed to have a substantial fair value
B A global advertising campaign which was concluded in the previous financial year and from which benefits are expected to flow in the future
C A contingent asset of the subsidiary from which the parent believes a flow of future economic benefits is possible
D A customer list which the directors are unable to value reliably
And they have given the answer as A.
Ah, so because it is not an intangible asset, that is why it can be recognised separately in goodwill?
I think I need to get my head around the wording of the question and possible answers as that’s not how I read the question initially!
Thank you for your help.Ok, so in those examples I would recognise separately from goodwill?
The question I was originally stuck on was question 2 in the specimen paper, and it wasn’t immediately obvious to me why the answer was the research project.
Thank you.