A flexible merger model should be able to have the deal date as a flexible input.

This will have an impact on how we consolidate our financial statements in the deal year.

If we look at the balance sheet and the income statement prior to the deal year, we can see that this is relatively simple.

We just take the acquirers financial statements only.

If we look in the year after, so the post deal year, we can see we've used consolidation acquirers, financial statement plus the targets financial statement, plus any deal effects.

Maybe on the balance sheet we've had a debt issuance, and on the income statement, we would've interest on that debt issuance in the deal year.

The balance sheet at the end of the year is exactly the same.

Acquirer plus target plus deal effects.

But the income statement, that's a bit trickier here. We need to take the acquirer's income statement plus the target's stub period income statement plus a new deal effects.

So here we have an example here. We've got a targets financials already calendarized to the acquirer's year end, and that's a calendar year.

Our deal date is gonna be the 1st of April during that year.

So three twelfths into the year.

The stub period is the period thereafter.

That's the period that the acquirer gets to purchase and it gets the net income from that.

The period before the deal date is the roll forward period.

So how do we calculate that roll forward and the stub period? Well, the calculation for the roll forward period is the deal date minus the prior year end all over the number of days in the period.

In our example, that would be the 1st of April year on minus the 31st of December, year zero all over 365, and that gets us to 25%.

The stub period is then one minus the roll forward period.

We now move on to the balance sheet at the deal date.

Now, that's not the balance sheet at the end of the year in the deal year, it's at the deal date itself.

A number of items in the balance sheet need to be known at this point.

For instance, we need to know the value of net assets.

If we're to calculate goodwill, we need to know the value of debt if we're doing any refinancing, the value of working capital, if we need any short term funding for it.

In short, we need to know these numbers.

We can use the roll forward period and stub period to help us out.

So what are the net assets at the deal dates? Well, let's assume that the net assets of the targets are 100 at the start of the year, and they're 112 at the end of the year.

As this deal date is exactly three twelfths through the year, and our net assets starts at a hundred and ends at 112, we can tell that our net assets at the deal date will be three twelfths through that 12.

So it's going to be 103, but how could we calculate it in a more difficult scenario? Will we take The prior year ending balance of a hundred times it by the stubb percentage, 75%.

We then add on the next year end balance of 112 times by the roll forward percentage of 25.

Now, it does appear as if the 75 and the 25% have been flipped around as if they've been done wrong and they're not.

Instead, timing the 100 by the 75% weights us towards the start of the year.

It pulls us towards the 100, and that's why we end up at 103.

The cashflow statement at the end of the deal year needs to be forecasted.

In order to do this, we take the net income from the consolidated income statements, other items in the cashflow statement such as inventory, we would take the acquirer's cashflow statements plus the calendarized targets cashflow statement times by the sub period.

So very similar to the income statements.

Lastly, for the acquisition price, it's cash paid less.

Cash acquired.