When a subsidiary is acquired mid-year, how do you allocate the subsidiary's profit between pre- and post-acquisition periods? What practical issues arise with interim dividends?
A core Group Accounting interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The subsidiary's profit is split based on the date control is obtained. Pre-acquisition profits are not included in consolidated profit; they are part of the net assets acquired. Post-acquisition profits are included in group profit and NCI. For interim dividends declared before acquisition, they are treated as a reduction of the investment cost or as a return of pre-acquisition profits, depending on the accounting policy. Practical issues include obtaining accurate profit figures up to the acquisition date and adjusting for any dividends that may have been paid out of pre-acquisition profits.
WHAT INTERVIEWERS LISTEN FOR
- ✓Profit split based on acquisition date
- ✓Pre-acquisition profits excluded from group profit
- ✓Interim dividends: reduce investment or pre-acquisition profits
COMMON MISTAKES
- ✗Including full-year profit without time apportionment
- ✗Ignoring interim dividend treatment
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