Understanding Post Profit in the Context of Holding Company Acquisitions
When a holding company acquires the shares of a subsidiary company at the beginning of the year, the resulting profit is termed as post profit. This article delves into the concept of post profit, providing a detailed explanation and practical examples to clarify the financial implications.
What is Post Profit?
When a holding company acquires shares in a subsidiary company, the profit generated from that subsidiary is categorized as post acquisition profit. This is because the holding company only acquires control over the subsidiary once the transaction is completed. Post acquisition profits are basically the profits earned by the subsidiary after the acquisition date.
Reasoning Behind Post Profit Classification
The classification of profits as 'post' or 'pre' acquisition is based on the timing of when the holding company became the owner of the subsidiary. Pre acquisition profits refer to the profits earned by the subsidiary before the holding company acquired its shares, while post acquisition profits indicate the earnings post the acquisition.
Post Profit Example
Let's consider an example to illustrate the concept. Suppose, at the beginning of the financial year 2016, a holding company purchases shares of a subsidiary company. It spends 100 units of currency to acquire 100 shares from the subsidiary, which had a net worth of 150 units of currency (50 units in equity share capital and 100 units in reserves and surplus).
In this scenario, the holding company pays 100 units and receives 150 units worth of assets, translating to a 50-unit profit. However, since the holding company’s business is not about acquiring other companies, this profit is treated as a one-time event and recorded as capital profit, allocated to the capital reserve.
After the acquisition, the holding company can make decisions that affect the subsidiary's profits, which would be considered post acquisition profits. This is reflected in the consolidated financial statements to align with the performance of the subsidiary for the holding company's shareholders.
Understanding the Terminology
The terms 'pre' and 'post' acquisition profits are crucial in understanding the financial dynamics of holding companies. Here's a brief explanation of the terms used:
Pre-acquisition Profits: These are the profits earned by the subsidiary before the holding company acquired its shares. In our example, the subsidiary had earned 100 lakh rupees in profits up to March 31, 2016. Post-acquisition Profits: These are the profits earned by the subsidiary after the holding company acquired its shares. In our example, the subsidiary earned 10 lakh rupees in profits for the financial year 2016-2017.Implications and Practical Application
In the consolidated financial statements, the post-acquisition profits provide valuable insights for the shareholders of the holding company. They reflect the subsidiary's performance under the control of the holding company, thus allowing stakeholders to evaluate the subsidiary's contribution to the holding company's overall financial health.
It is important to note that these profits are treated as revenue profits, as they are earned by the holding company post the acquisition. Conversely, the pre-acquisition profits, which are termed capital profits, are recorded as the return on the investment made by the holding company in the subsidiary.
Conclusion
The distinction between pre and post acquisition profits is significant for both accounting and strategic planning purposes. Understanding this concept is essential for investors, analysts, and financial managers to accurately assess the financial performance and viability of holding companies and their subsidiaries.
Related Keywords
post profit holding company subsidiary pre and post acquisition profits consolidated financial statementsFurther Reading
To gain a deeper understanding of these concepts, you may refer to the following resources:
Investopedia: Post-Acquisition Profit Accounting Insider: Subsidiary Company Franchise Zone: Understanding Holdings and Subsidiary CompaniesStay tuned for more articles on accounting and financial strategies!