DFS Dec 06 Paper Task 1.3

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Can anyone explain why in Task 1.3b the retained earnings are split at acquisition and also since acquisition?

I thought that as the acquisition occured on 1 Oct 05 and the year end is 30 Sept 06 that it would just be done for the full year? I'm confused! Would be grateful if anyone could shed some light for me please.

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS Dec 06 Paper Task 1.3

    When a company buys an interest in another company it is purchasing a percentage of it's assets. At acquisition the retained earnings of the subsidiary form part of those assets. In buying those assets the parent company also buys an interest in the future benefits flowing from those assets.

    In the year following acquisition the subsidiary continues to make a profit. Part of this profit is attributed to the parent and part to the subsidiary on the basis of the percentage owned by the parent.

    The main practical difference is that the 'at acquisition' earnings of the subsidiary are not added to the retained earnings of the parent. The attributable percentage of 'since acquisition' earnings are.

    I'm not sure I've explained that too well but I hope it helps a bit.

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS Dec 06 Paper Task 1.3

    Thanks for your reply - I understand what you are saying but as the company acquired the other company at the beginning of that financial year I cant understand why its been split? (Split as in Retained Earnings at acquisition and since acquisition)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS Dec 06 Paper Task 1.3

    The subsidiary has made profits during the financial year (ie after the takeover) a proportion of which is attributable to the parent company. These form part of the retained earnings of the parent.

    The 'at acquisition' retained earnings of the subsidiary have nothing to do with the parent company - they were made before the takeover. They essentially just form part of the valuation of the subsidiary.

    They get split out as they need to be treated differently in the accounts.

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