Unrolling discount query

Dear Mike,

Below is your response to a unrolling discount query, I am struggling to find how the figure of 1,183 interest (unrolled discount) was calculated.

I assumed $11,270 is unrolled is 11,270 * 10% * 6/12

Therefore should be 1127 + 563.5 = 1690.5?

Please explain where I am going wrong.

Many thanks

Let’s assume that the company’s cost of capital is 10% and that the deferred consideration of $15,000 is the actual amount payable in 3 years’ time

The present value of that $15,000 discounted at the rate of 10% is $11,270

That figure is calculated by successively dividing $15,000 by 1.1 ie by (1 plus the cost of capital expressed as a percentage)

15,000 / 1.1 = 13,636
13,636 / 1.1 = 12,397
12,397 / 1.1 = 11,270

So, in working W2, goodwill, the present value of $15,000 payable in 3 years’ time is $

At 1 July, 2011, 6 months after the takeover, we need to unroll that discounted value and debit finance charges in the statement of profit or loss , credit the long term liability on the statement of financial position

The amount by which the $11,270 is unrolled is 11,270 * 10% * 6/12

That works out to be $563.5

You ask about the consideration as at 1 July, 2012

The value of the consideration will not change after you have calculated it as at date of acquisition. It will have been recorded in the goodwill calculation at a value of $11,270 and that’s the figure it will stay at (together with the $20,000 cash payment on the date of acquisition)

Well, having unrolled for half a year to July 2011, you’re now in the position for next year 2012 to unroll for the full year ie 10% x 11,270 + 563.5

That gives, for the year 2012, the amount of 1,183 interest (unrolled discount)

Debit finance costs, credit long term liability (because it’s still more than 12 months to payment date)