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Hi Mike,
Really like your lectures, they are brilliant. I am struggling with two topics at the moment.
1) treatment of unwinding discount (deferred payment)
2) when parent issues a loan to sub as a part of considerationThe second topic treatment is dealt differently in Kaplan notes and confusing.
Thank you in advance.AKHTER
1) The unwinding of a discount (deferred consideration) is simply a charge to the Income Statement (I/S) for the post-acquisition period in the question.
For example, if you said you were going to pay $100 in 1 year and the discount rate is 10%, then you would do the following:
– Discount the $100 to present value: $100 ÷ 1.1¹ = 90.91 (PV of consideration)
– Then, we unwind the discount simply by multiplying by the discount factor… 90.91 x 10% = 9.1Therefore, DR Finance Charge (I/S) 9.1 and CR Deferred Consideration Liability (SFP) 9.1.
NOTE: If it is a mid-year acquisition, which almost always happens in the exam, then you have to time apportion the unwinding discount finance charge (i.e. x 6/12 if we purchased the subsidiary 6 months ago), because we haven’t incurred a full year’s worth of charge.
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