pre acquisition dividend means dividend related to period prior you purchased share.

dividend relate to period not from the source

suppose you are share holder of share can u know from which profit dividend has been declared.

even if when  a dividend is declared out of current year profit which is  basically  intrim dividend and if you have also purchased the share in current year and so the dividend so far its related to period prior to acquisition is adjusted against the cost.

period is important not source.

i might be wrong but i am putting my understanding.

and dont mix AS 13 with AS 21

and tell me if you are a holder of share and you have to Account then how you can take information which month profit you have declared dividend.

please make us clarified also if we are going on wrong direction.

Thanks

Linesh,

AS-13 clearly uses the words "When dividends on equity are declared from pre-acquisition profits, a similar treatment may apply." It speaks of the source of dividend. Source is important.

But this is relevant only during consolidation procedures. As a normal share holder i will not know the source of dividend. If i purchase the shares cum dividend then i will reduce it from the cost. If the shares are ex-dividend, then it will be my income. 

I agree with Mr. Azim Khan's reply.

Other replies are very confusing and lenghty....

This is what I understood about Pre-acquistion dividend

Subsequent to being acquired, the subsidiary company pays dividends out of pre-acquisition profits to the holding company. Such dividend to the holding company is Pre-acquisition dividend.

 

 

 

Mr. Krishna and Mr. Linesh have made it very simple to understand.

I think the discussion is misdirected a bit. In simple words, what I know, Pre acquisition dividend is the dividend which relates to a period when the current shareholder was not the shareholder. For example: I purchase shares in december 09 of a company and subsequently receive dividend for P.Y. 2009-10, then the portion of dividend of upto Dec. 09 will be pre acquisition profit. Thats it !! @ Krishna: Your answer seems logical, but tell me how will it be distinguished in months. For, example, Co. declares dividend of Rs. 50,000.00 out of distributable profit of Rs. 1,00,000.00. Then, considering my above example, how can you say that profits relate from which period, is it of Ist half or @ nd half or of alternative months or any other???????

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.

Go with MR.Azim's reply....

For all those who are literally ignorant of the concept of Pre - acqusition dividend, eat this. The below mentioned highlighted lines in yellow are from the Institutes study material (CA final new syllabus - Financial reporting volume 1- Page No- 5.16). This concept applies also to those who are shouting that it is confused. Get a life..

 

 

 

2.6 DIVIDEND RECEIVED FROM SUBSIDIARY COMPANIES

 

The holding company, when it receives a dividend from a subsidiary company, must

distinguish between the part received out of capital profits and that out of revenue profits

the former is credited to Investment Account, it being a capital receipt, and the latter is

adjusted as revenue income for being credited to the Profit & Loss Account. It must be

understood that the term ‘capital profit’, in this context, apart from the generic meaning of the term, connotes profit earned by the subsidiary company till the date of acquisition. As a result, profits which may be of revenue nature for the subsidiary company, may be capital profits so far as the holding company is concerned. If the controlling interest was acquired during the course of a year, profit for that year must be apportioned into the pre-acquisition and post-acquisition portions, on the basis of time in the absence of information on the point.

 

Illustration 6

H Ltd. acquired 3,000 shares in S Ltd., at a cost of Rs. 4,80,000 on 1st August, 2006. The capital of S Ltd. consisted of 5,000 shares of Rs. 100 each fully paid. The Profit & Loss Account of this company for 2006 showed an opening balance of Rs. 1,25,000 and profit for the year of Rs. 3,00,000. At the end of the year, it declared a dividend of 40%. Record the entry in the books of H Ltd., in respect of the dividend.

 

Solution

The profits of S Ltd., have to be divided between capital and revenue profits from the point of view of the holding company.

 

                                                     Capital Profit                         Revenue Profit

                                                     Rs.                                       Rs.

 

Balance on 1.1.2006                    1,25,000 —

 

Profit for 2006 (3,00,000 × 7/12)  1,75,000 (3,00,000×5/12)       1,25,000

 

Total                                             3,00,000                                  1,25,000

 

Proportionate share of H Ltd. (3/5) 1,80,000                                  75,000

 

The treatment of the dividend of Rs. 1,20,000 received by H Ltd., will depend on the

character of profits which have been utilised by S Ltd., to pay the dividend. There are four possibilities:

 

(1) Earlier profits, included in the profit brought forward from the previous year have been used up first. In that case, the dividend of Rs.1,20,000 would be paid wholly out of capital or pre-acquisition profits. The entry in that case will be:

                                        Rs.                          Rs.

         

          Bank Account Dr. 1,20,000

                                 To Investment Account 1,20,000

 

(2) The profit for 2006 alone has been utilised to pay the dividend, and no part of the profit brought forward has been utilised for the purpose. The share of H Ltd., in profit for the first seven months of S Ltd., is Rs. 1,05,000 i.e., Rs. 1,75,000 × 3/5 and that the profit for the remaining five months is Rs. 75,000. The dividend of Rs. 1,20,000 will be adjusted in this ratio: Rs. 70,000 out of profits up to the lst August and Rs. 50,000 out of profits after that date. The dividend out of profits subsequent to August 1st will be revenue income and that out of earlier profits capital receipt. Hence the entry.

               Rs.                            Rs.

 

Bank Dr. 1,20,000

         To Investment Account        70,000

         To Profit and Loss Account 50,000

 

(3) Later profits have been utilised first and then pre- acquisition profits. In such a case, the whole of Rs. 75,000 (share of H Ltd. in profits of S Ltd., after 1st August) would be received and treated as revenue income; the remaining dividend, Rs. 45,000 (Rs. 1,20,000 less Rs. 75,000) would be capital receipt. The entry would be:

 

                       Rs.                  Rs.

 

Bank Dr. 1,20,000

        To Investment Account 45,000

        To Profit & Loss Account 75,000

 

(4) The two profits, pre-and post-acquisition, have been used up proportionally. The ratio

would be Rs. 1,80,000 : 75,000; 1,20,000 ×75 000

                                                                     ______

                                                                      2 55 000

would be revenue receipt and the remaining capital. The entry would be:

                Rs.                                 Rs.

Bank Dr. 1,20,000

         To Investment Account        84,706

          To Profit & Loss Account    35,294

Notes:

(1) Points (3) and (4) above can arise only if there is definite information about the profits

utilised; in practice such treatment is rare.

 

(2) The treatment outlined above in fact is not peculiar to holding companies-dividends

received out of profits earned before purchase of investments normally also are credited

to the Investment Account. For instance, if shares in X Ltd., are purchased in January,

2006 and in April X Ltd., declares a dividend in respect of 2005, the dividend received by

the holder of the shares correctly should not be treated as income but as capital receipt,

and credited to Investment Account.

 

(3) The holding company, like other holders, records no entry on issue of bonus shares by the subsidiary company - only the number of shares held is increased.

Originally posted by : CA Azim Khan
	To all, i am not able to understand one thing, are we are here to help others or to make them more confuse? i have seen most of the replies which are only confusing rather than making others to understand.

Mr.Azim,

No one posts replies for the sake of fun or to confuse others. 

"Whats Pre-Acquisition Dividened received?"

This was the question asked. Was it mentioned whether the receiver was an individual shareholder or a company???? 

Being a qualified chartered accountant you should be able to appreciate the concept that pre-acquisition divided does not apply only in AS-13. It plays a crucial part in AS-21 as well.

Did the initiator ask only of AS-13??? NO.

Whats wrong in trying to help him understand the correct concept???

I am not sitting here to confuse every one who crosses my way. If you yourself are confused with this concept, then please update.

Nothing personal here

TO krishna,

let me tell you one thing, you are abusing this forum by way of criticizing others. as far as i am concerned, i have better knowledge and experience than you, i think you studied only As-21 thats why imposing your views on others. as it can be seen that you are an article, you have not faced CA final exam, isliye zayada hawa me mat udo. ek do ASs ratt lene se khud ko dusro se superior mat samjho. tumhare replies bahot hi rude hain. you have pasted entire things as it is from a book, tumne apne own se kya suggest kiya? aur jaha tak mere updation ka sawal hai, wo main tumse zyada hu. tum sirf apni fikr karo.

i hope u would have understood.

Thanks

To all my friends,

in order to make others(including me) to understand the concept of PRE-ACQUISITION RECEIVED, please try to understand this which i am going to write in simple words.

- when the subsidiary co. pays dividend, the holding co. being the owner will receive proportionate amount of dividend by cheque.

- if this dividend pertains to the period before the investment was made, then it is referred as PRE-ACQUISITION DIVIDEND.

 Journal Entry would be

Bank a/c Dr.

    to Investment a/c

 

- alternatively, if such dividend is for a period after acquisition, it is POST ACQUISITION DIVIDEND and it is a Return on Investment

journal entry would be

Bank a/c Dr.

    to P&L a/c

 

Note: the above is the requirement UNDER AS-13, ACCOUNTING FOR INVESTMENTS and applies to separate financial statement (SFS).

if the holding company co. has made the error in accounting by taking the pre-acquisition dividend to P&l a/c, a rectification entry is called for as per AS-13

journal entry would be

P&L a/c Dr.

    to Investments a/c

it must be noted that, the above rectification is under AS-13, an SFS requirement which is independent of AS-21. even if the consolidation is not done, the above rectification entry must be passed to release the SFS of the investor in accordance with Accounting Standard.

please rectify me, if i am wrong.

Thank you

Regards

Hi New2Accounts

Pre-acquisation dividend is that dividend which pertains to the period before the company is acquired. Since revenue profit is that profit which is earned from operational activities by the entity such dividend can't be said as the revenue profit. Its bascially of capital nature and thus deducted from the cost of acquisation or adjusted adjusted goodwill paid for acquisation.

Cheers

CMA Hemant

I think concepts of AS-21 & AS-13 have been mixed here..

For AS-21

Pre-Acquisation & Post-Acquisation profits will be classified as

For subsidiary company --> From source from which it had paid dividend.

For Holding Company --> According to period of holding (i.e. as prescribed by AS-13)

AS-13

 

12. 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 to make 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.

As per generally followed accounting rule if a person is not entitled to receive an amount but still he receives, such receipt is treated as capital receipt.

AS-13 also enumeratethe same  Principal.

 

Please also share your views as Accounting Standards seems to be simple but too technical.

Krishna madm ...thankz for the long explanation...but its really confusing....for an ipcc student...

Please tell me with a example how to calculate year