June '15 - 1st Question, Section B

Because, on the event of a take-over, we need to know the fair value of the assets acquired for the purposes of computing goodwill. But we won't be given a statement of financial position as at date of take-over part way through the year So we need to go back to the fundamental accounting equation that we came across in F3 (or University ... if you were crazy enough to take advantage of the exemption!) and that equation tells us that: shareholders' funds = net assets This extends in a take-over situation to: shareholders' funds = fair value of net assets Now consider the component element of shareholders' funds Share capital, share premium, other reserves and retained earnings But those retained earnings will be stated as at the previous financial year end so we need to time apportion the current year's earnings to be able to deduce ... the retained earnings figure as at date of acquisition and thus shareholders' funds as at date of acquisition and thus the fair value of the net assets as at date of acquisition Does that answer it?

Yes, it is. Thank you, Mike.

You're welcome