When analysing a company, the equity sales person has noticed that the company has incurred a large development cost relating to a new product and has stated that the costs meet the necessary criterion to be capitalised. The analyst feels a more reasonable treatment of this item would be to expense it, in the year incurred. The company has a tax rate of 30%. The company acquires 100% of shares in another company called Horizon for cash of £4.8 million. Net assets Horizon are £3.3m. There is an upward fair value adjustment of £0.4 m required to the acquirees’ net assets. The acquired company has a 0.2, in process development costs that have not been previously recognised but now meet the necessary capitalisation criteria. Explain how a company could acquire intangible assets. With regard to the development costs, what will be the implication for the financial statements of the two different approaches? Include any relevant ratios.
When analysing a company, the equity sales person has noticed that the company has incurred a large development cost relating to a new product and has stated that the costs meet the necessary criterion to be capitalised. The analyst feels a more reasonable treatment of this item would be to expense it, in the year incurred. The company has a tax rate of 30%.
The company acquires 100% of shares in another company called Horizon for cash of £4.8 million. Net assets Horizon are £3.3m.
There is an upward fair value adjustment of £0.4 m required to the acquirees’ net assets.
The acquired company has a 0.2, in
Explain how a company could acquire intangible assets.
With regard to the development costs, what will be the implication for the financial statements of the two different approaches? Include any relevant ratios.
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