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ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Pellam Group acquired 80% of Sorin Co during the year. Consolidated operating profit includes Sorin for six months. A lender analysing Pellam's interest cover and trend in profit wants to compare performance with the prior year. Which is the most appropriate analytical step?

The analyst should separate organic growth from acquired growth, or use pro-forma full-year figures, because Sorin contributes only six months this year and nothing last year. Without this adjustment, the trend in consolidated profit and interest cover would not be like-for-like.

  1. AAdjust for the part-year contribution of Sorin, for example by considering pro-forma full-year figures or organic growth separately from acquired growthCorrect
  2. BIgnore the acquisition, since consolidated figures are always comparable year on year
  3. CDeduct the whole of Sorin's profit, including the 20% non-controlling share, from the consolidated profit to get like-for-like figures, and then add back the non-controlling interest
  4. DUse only the parent's separate financial statements for all trend analysis

Explanation

A part-year acquisition distorts comparatives, so analysts separate organic from acquired growth or use pro-forma full-year data. Consolidated figures are not automatically comparable. Parent-only statements ignore the group's borrowings and subsidiaries. The third option is confused and not a standard approach.

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