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Hi Mike,
could you please help me to understand why we for calculation of G/W need to adj FV of SNA @ DOA part for Cyclip’s profit for the year. So we need to take into consideration (2400+100)*3/12.
I am clear with the part that is related with interest capitalization, but I am not sure for the subs. profit.
Thank you in advance.
Regards.
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?
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