Pre-acquisition reserves
Definition
The reserves a subsidiary held at the date it was acquired. They belong to the previous owners, so they are eliminated against the parent's investment and are not part of group reserves.
Why does it matter in a group?
Pre-acquisition reserves are what the subsidiary had earned before the group bought it. They were paid for in the price, so on consolidation they are eliminated together with the share capital against the parent’s investment. What remains is goodwillGoodwillThe amount by which the price paid for an acquisition, together with any non-controlling interest and any previously held stake, exceeds the fair value of the identifiable net assets acquired.Open the glossary entry. Reserves earned after the acquisition dateAcquisition dateThe date on which a parent obtains control of another company. The new subsidiary's results are included in the group accounts from this date.Open the glossary entry are post-acquisition. They stay in group reserves, shared with the non-controlling interestNon-controlling interestThe share of a subsidiary's equity and profit that belongs to owners outside the group.Open the glossary entry where there is one. Getting the split wrong changes goodwill and the profit the group appears to have earned since the purchase.
A small example
Zenvara pays GBP 5,000,000 for all of Palmridge, whose share capital is 1,000,000 and pre-acquisition reserves 3,000,000. The elimination entry removes 1,000,000 plus 3,000,000 against the investment of 5,000,000. The 1,000,000 left is goodwill.