Pre-Acquisition Profits, Post Acquisition Profits

Pre-Acquisition Profits

Pre–acquisition profit is the profit of the subsidiary before it is acquired. Such pre-acquisition profit belongs to the shareholders of the subsidiary before it is being acquired by the Parent company. It forms part of the net assets of the subsidiary at acquisition. Pre-acquisition profits are the reserves which exist in a subsidiary company at the date when it is acquired. Accumulated profits and reserves which appear in the balance sheet of the subsidiary company up to the date of acquisition of its shares by the holding company are called pre-acquisition profits and reserves. Both the holding company and the minority shareholders will have proportionate share in such profits and reserves. The share of the minority shareholders in such profit and reserves will be added to the amount of minority interest. But the holding company’s proportionate share in such profits and reserve should be treated as capital profits and credited to Capital Reserve since the holding company cannot earn any revenue profits from its subsidiary before the shares are acquired in it. While preparing the consolidated balance sheet, this Capital Reserve should be shown on the liabilities side or if there is any Goodwill, it can be shown as a deduction from the Goodwill in the assets side.

Pre – acquisition profit includes:

• Retained earnings
• Share premium
• Revaluation surplus
• Other capital reserves

Post–Acquisition Profit

This is the increase in the reserves (retained earnings) of the subsidiary after it has been acquired by the Parent company. In other words, it is the difference between the profit or loss account at acquisition and the profit or loss account at the date of consolidation. Profits earned or losses incurred by the subsidiary company after the date of acquisition of its shares by the holding company are called post-acquisition profits or losses. Both the holding company and the minority shareholders should share such profits or losses in proportion to their respective holdings. The minority shareholders’ share in such profits should be added to the amount of minority interest while their share in such losses should be deducted. So far as the minority shareholders are concerned, there is no difference between the pre-acquisition profits or losses and the post-acquisition profits or losses. But, so far as the holding company is concerned, it makes a lot of difference. The holding company’s share of such profits or losses should be treated as revenue profits or losses and as such credited or debited to its profit and loss account.