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Whats Pre-Acquisition Dividened

New2Accounts (article) (103 Points)

06 October 2010

Whats Pre-Acquisition Dividened received?

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32 Replies

Sunshine (Helping All) (10575 Points)
Replied 06 October 2010

suppose u purchase shares of xyz ltd in april 2010....and the company declared dividend on those shares related to the f.y 2009-10....that dividend will be received by u coz your name is on the register...this is pre accquisition dividend which will be deducted from the cost of the investment..

2 Like

RAMESH POLINENI (ca) (352 Points)
Replied 06 October 2010

The pre-acquision dividend will reduce the cost of investment

Azim Khan ACA,CS,CMA*,LLB* (Proprietor) (1312 Points)
Replied 06 October 2010

It means dividend received for a period in which you did not hold those shares.

As13 asks to reduce the pre acquisition dividend from the cost of the investments.

3 Like

krishna Teja (CA Final) (85 Points)
Replied 06 October 2010

Originally posted by : Sneha Bagla
	suppose u purchase shares of xyz ltd in april 2010....and the company declared dividend on those shares related to the f.y 2009-10....that dividend will be received by u coz your name is on the register...this is pre accquisition dividend which will be deducted from the cost of the investment..

Not exactly sneha.

Pre acquisition dividend is the dividend received out of pre-acquisition profits.

In the example given by you. Suppose the Pre-acq profits are 50,000/- and post - acq profits are 70,000/-. If dividend is declared on those shares for F.Y- 2009-10 out of this 70,000/- it will not be pre - acq dividend. It will be Post acq- dividend and will be credited as income.

The division of dividend into Pre & post acquisition will depend on the source of such declaration.

For this profits of the company have to be correctly divided into pre acq profits and post- acq profits basing on the date of acquistion.

Profits prior to date of acqusition are pre acquisition profits. Profits of current year have to be apportioned into pre & post acquisition profits, basing on the assumption that they are accrued evenly during the year.

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Sunshine (Helping All) (10575 Points)
Replied 06 October 2010

@ krishna......

i said the dividend of f.y 2009 -10...there is no question of post acquisition profit here bcoz he purchased shares after the financial year 2009-10 was completed ...i.e in april 2010......

krishna Teja (CA Final) (85 Points)
Replied 06 October 2010

Dear Sneha,

Suppose i purchased 100 % of the shares of XYZ co on 1st May 2010 ( FY being from April 2010 to March 2011).

Profits upto April 2010 are Rs.1,00,000 - Capital profit

Profits from April 2010 to May 2010 are Rs. 50,000/- - Capital profit

Profits from May 2010 to June 2010 are Rs. 1,20,000/-. - Revenue profit.

Profits from July 2010 to September 2010 are Rs. 1,50,000/-. - Revenue profit.

Now, the company declares dividend of Rs.20,000/-.for the period from April 2010 to June 2010.

If the 20,000 is declared form capital profits - only then it will be pre-acquisition dividend.

If declared out of Revenue profits - it will be post acquisition dividend.

Now, the company declares dividend of Rs.40,000/-.for the period from July 2010 to September 2010.

If the 40,000 is declared form capital profits - it will stil be pre-acquisition dividend. Even though the period June-September relates to period after my acqusition, it will still be pre-acq dividend becasuse it is declared form capital profits.

If declared out of Revenue profits - it will be post acquisition dividend.

Coming to your example.

Suppose dividend for FY 2009-10 is not declared. But dividend of Fy 2009-10 and 2010-11 is declared out of profits of 2009-10 in FY 2010-11. It will be pre-acquisition dividend because of the source of declaration.

Suppose dividend for FY 2009-10 is not declared. But dividend of Fy 2009-10 and 2010-11 is declared out of profits of 20010-11 in FY 2010-11. It will be post-acquisition dividend because of the source of declaration.

Just because i purchased shares in 2010 i cannot say that every dividend declared for previous year is pre-acquisition and dividend declared after my purchase is post acquisition.

Hope you understand this because this is a very crucial concept in Ca final exams.

3 Like

Sunshine (Helping All) (10575 Points)
Replied 06 October 2010

thanx for explaining...i answered as per my level...thats what i learnt ....wasnt aware abt this

(Guest)

Why Krishna madam , so confusing is your reply?

tell me one thing, when P&L is prepared for a year by the company... hw can a company distinguish profits in terms of your understanding. The distinction is on the part of holder of shares. Holder will nt be having such to the point detail of profits at various stages. Moreover, company will declare dividend from its earned income. In that income, its no where written that its fr post/pre unless acquisition of business has taken place.

Reduction of such dividend is totally on part of shareholder.. pls see this text...

As per AS 13, the concept of reducing the cost of Investment comes only when dividend/interest clearly represents the recovery of cost. Generally dividend amount will be reduced from the cost in the following two cases

1. when the investments are purchased on cum dividend basis.

2. when the dividend is declared out of pre acqisition profits.

For your easy reference, I am reproducing the Para 12 of AS 13 here:

Interest, dividends and rentals receivables in connection with an investment are generally regarded as income, being the return on the investment. However, in some circumstances, such inflows represent a recovery of cost and do not form part of income. For example, when unpaid interest has accrued before the acquisition of an interest-bearing investment and is therefore included in the price paid for the investment, the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods; the pre-acquisition portion is deducted from cost.When dividends on equity are declared from pre-acquisition profits, a similar treatment may apply. If it is difficult tomake such an allocation except on an arbitrary basis, the cost of investment is normally reduced by dividends receivable only if they clearly represent a recovery of a part of the cost.

You have mixed up everything both from Co's angle and Shrholdr view.

Regarding your source viewpoint.... pls read the above text of AS13 and decide as per Shareholders point .... Do not mix up Co. in between.. First decide in whose book you want to account & how?

I agree with all members reply upto CA Azim Khan. ... After that i am very confused regarding Krishna madam reply...

(Guest)

Practically, when a share is acquired its either cum dividend or ex- dividend. When its cum dividend , it means shareholder has paid for dividend to the previous holder. Here at that point how can you make such wild and airy distinction. Transaction will happen so soon that poor chap wil not know from where that dividend is coming to him.

For him its just pre acquisition dividend.. What you have talked about is just from Co;s angle....

I am sorry if you are hurt by my reply... but i am confused by your reply...

C.A. LINESH PATIL (CA) (910 Points)
Replied 06 October 2010

hello dear ,

pre acquisition dividend pertains to period, prior to period you acquire share.pre acquisition dividend only has relevance with period.if dividend pertains to period before you purchase share its pre-aquisition dividend or if dividend pertains to period after purchasing of share its post acquisition.its only a matter of timing.therefore any dividend which is declared for the period after you purchased the share its post acquisition and your income therefore taken to P&L A/c

As per AS 13 investment should be accounted at cost paid.suppose you hold share for period 1.4.09 to 31.3.09.and you have information that company is going to declare dividend on these share Rs 50 and market price of share is Rs 300.

Now i approach to you to sell these share to me so you tell me how much you charge to me to sell these share.surely you will ask me to pay 350 Rs because 300Rs for share price and 50 Rs for dividend because its your income you hold share for that period.and if you sell these share to me i will receive this dividend being a register holder of share.

so you will charge me 50 RS today what i am going to get tomorrow and what you are going to loose tomorrow.

but today cost to me is 350 Rs and as per AS 13 i will book investment at Rs 350 and if subsequently i received dividend of Rs 50 or any other amount i will deduct this amount from the amount of investment because.suppose i receive 50 rs so this is not income to me its just refund to me by company which i paid to seller of share.

thats why treatment of As 13 says reduce pre-acquisition dividend from what you paid.because as per historical cost concept we must A/c at cost.

1 Like

krishna Teja (CA Final) (85 Points)
Replied 06 October 2010

@ Member (Account deleted).

Two things first :-

1) I am a male. Kishna Teja

2) Please dont get confused between pre acquisition profits and post acquisition profits.

Pre acquisition profit - Opening profit + Current year profit accrued upto the date of investment.

Post acquisition profit - Profit accruing after my acquisition.

As per AS-13 "When unpaid interest has accrued before the acquisition of an interest-bearing investment and is therefore included in the price paid for the investment, the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods; the pre-acquisition portion is deducted from cost. When dividends on equity are declared from pre-acquisition profits, a similar treatment may apply. If it is difficult tomake such an allocation except on an arbitrary basis, the cost of investment is normally reduced by dividends receivable only if they clearly represent a recovery of a part of the cost."

Read the highlighted lines in blue again.

That is what i said in the example given by me. All dividends declared out of pre acquisition profits (capital profits) are Pre-acquisition dividends (whether they relate to pre acquisition period or post acqusition period). They should be deducted from the cost of investment.

Understand one crucial thing here. The timing of dividend is not important. Also if dividend pertaining to periods after my acquisition is declared out of pre-acquisition profits it is still pre-acq dividend. Remember Company's Act here. Dividend can be declared out of Previous year's profit.

Now read the lines in yellow.

It resolves your second query. The ASB recognized the difficulty of shareholders. In case of any difficulty and ambiguity in apportionment treat it as income.

During consolidation procedures, this is very important. The treatment should be followed by the investor. He has to get the facts right.

Please refer M.P.Vijay kumar's Final Acounts book. A flow chart is given which clearly explains the concept.

1 Like

krishna Teja (CA Final) (85 Points)
Replied 06 October 2010

@ Member (Account deleted).

On a lighter note,

If the procedure is confusing, neither the Law nor me is to be blamed. A procedure is procedure. An investor has to follow it. Calling him a "poor chap" just dosent relieve him of his duties. Consolidation procedure are definitely confusing and difficult. But still they have to be followed. If you are a final student you will have an idea of it.