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Hi Mike,
I am having some problems in calculating the pre and post acq. retained earnings in the situation of a midyear acquisition.
In this following question the profit fr the year is 9k and there is PURP from NCA of 4500, here the 9k of profit is time apportioned according to the pre and post periods and the NCA is being deducted from the post acq. retained earnings. Alongside, there is comprehensive example, OT notes, chapter 9 where the profit from the year splits after deducting the PURP from NCA into the pre and post periods after which fair value adjustment of inventory is added to the pre acq. retained earnings giving the net assets at the DOA.
If i follow the kaplan method without deducting PURP from profit before apportioning, i am having a different net assets value at acquisition in comprehensive example and if apply your method to the TYU-7 the value of net assets is different from the answer. Can you tell me how it can be calculated and why is the difference ?My Kaplan course notes for CSoFP only go up to Test Your Understanding 6.
The comprehensive example adjustment is for the fair value of inventory – it’s not an adjustment for pups.
Generally though, split the profit for the year ( beware the situation where there are transactions which specifically took place in the post acquisition period ). Having split on a time basis, adjust for the pup in the post acquisition part.
I hope that answers your question. If it doesn’t, post again but give me a proper reference.
Why the inventory is adjusted like that ? normally with inventory, the excess fair value is added to the net assets at date of acquisition and no adjustment take place in the post period assuming that the inventory will be used up till then as told by the comprehensive example. Actually, mid year acquisition is really confusing me in both CSOFP and CSOCI as i am using kaplan study materials it does not state much regarding mid year acquisitions and nor regarding to the transactions that take place in post acquisition periods that which are to be apportioned and which are not.
Can you help me with reference to examples ?Hi
The comprehensive example with the inventory fair value adjustment is an unusual one ( to say the least! ) The value of inventory part way through the year at the date of acquisition is 16,000 more than its book value. But that also means that the value of the inventory at the start of the post acquisition period is 16,000 understated. The effect of the 16,000 is therefore to reduce the cost of sales in the pre-acquisition period and to increase the cost of sales in the post-acquisition period.
But, as stated, this is really an unusual adjustment.
As for SoFP mid year acquisition problems, we need to perform a calculation to find the retained earnings brought forward plus the retained earnings for the pre-acquisition period ( by time-apportioning this year’s profits ) and need also to make adjustment for any fair value adjustments.
When calculating working 3, the retained earnings TODAY are adjusted for any asset fair value adjustments AS AT TODAY to give us P and S as at now. From this S figure, we deduct the S pre-acquisition retained earnings as already calculated in working 2 ( goodwill )
Is that any clearer?
Hey mike,
can you please elaborate this adjustment more ? i am still not clear. Here is this adjustment because all the inventory had been sold before the year end ?
Also can you tell me which other items can be adjusted like inventory in this question and how we will identify them ?When in a mid year acquisition profits are distributed according to the pre and post periods and if there is a purp or any fairvalue adjustment related completely to the post acq period we need to deduct first the purp from the profit from the year and than appportion according to pre and post for the goodwill calculation. Can you explain me this concept and is this for only post acq adjustments for the calculation of goodwill ?
Hi
I’ve now seen the Test your understanding question which you raised over a month ago. I think the Kaplan answer is incorrect. The sale of the TNCA SPECIFICALLY is identified as a post acquisition transfer and the profit should therefore be adjusted in the post acquisition period ( in my view! )
Apportion the year’s profits ( paying attention to any profits which are identified as being specifically related to only one period ) Having now arrived at the profits split, adjust the post acquisition element by any pups and fair value adjustments.
In a Balance Sheet question, fair value adjustments affect net assets at date of acquisition when calculating goodwill in working 2. They also feature in working 3 when determining the parent’s share of the subsidiary’s post acquisition ( and therefroe also when calculating the nci’s share of those subsiduiary post acquisition profits ) retained. But pups feature only in working 3 ( and indirectly affect working 4 because it may be the pup is in the subsidiary and therefore reduces the nci’s share of the subsidiary’s post acquisition retained )
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