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Would be helpful if you can advise about the impact on both Consolidated SOFP and P/L .
Do we need to eliminate the effect of dividend income from subsidiary and associate from Consolidated P/L .
Yes, most certainly! The reason for ignoring dividends is really very logical. The paying companies will finance the dividends out of post-tax profits. But for consolidation, we are including our share of those post-tax profits so not to ignore them would result in double counting
Is that clear?
Guess not.Do you mean , we need to ignore dividends from subsidiary and associate?
1- Subsidiary pays dividend.
Individual Account’s
Parent Dr Cash Subsidiary: Dr Retained Earnings
Cr Dividend Income Cr CashConsolidated Accounts:
P/L
it will be part of dividend income in Parent’s P/L.
SOFP:
As we Include post acquisition retained profits of subsidiary in consolidated reserves.So we include reserves after dividend.
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Consolidation adjustment would be :Dr Dividend Income (Parent’s )
Cr Retained Earnings (Subsidiary)Consolidate P/L reduced by dividend income
Consolidated SOFP – Consolidated reserves increased by same amount.
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Is it the correct treatment?2-Associate Pays dividend
Consolidated SOFP
Investment in Associate : Cost + post acquisition retained reserves. [They include after dividends amount of reserves ]
Consolidated Reserves : includes Post Acquisition retained reserves.[After dividend amount ]Consolidated P/L includes
One line Post acquisition profits current year from associate.Consoildation adjustment should be what.[ Not a clue ]
Can you please identify where i am getting it wrong.If you can’t can you just put all things like SOFP and P/L impacts .
Each individual company will account for dividends paid / received in the “normal” way
When it comes to consolidation, we simply ignore the dividends from subsidiaries and associates when calculating the consolidated income statement line “Investment income” – simply do not include the investment income that is paid within the group. But we do not change the retained earnings figures for any of those companies for the purposes of calculating working W3 Consolidated Retained earnings (the top line of working W3 is “per question” and there is no accounting / cancellation of dividends that have been paid. There is not even any effect on working W3 for dividends that are recorded as still payable / receivable even though there is an element of cancellation of Receivables against Payables for dividends declared but not yet paid)
The consolidated statement of income is merely an exercise in presentation of the consolidated results. We already know the figure for retained earnings for the statement of financial position from working W3
You ask where you are going wrong in your thinking. These adjustments are for presentation purposes only. They are not something for the application of double entry principles of debits and credits. No adjustments will be put through any of the companies’ accounts / records. It’s merely an exercise in tidying up so that we don’t show dividends receivable / received by a parent and, at the same time, show an amount payable / paid by ourselves to, effectively, ourselves.
They are cosmetic adjustments, not adjustments for recording within accounting records
Is that any better?
Perfect-I think so.
Really appreciate the help.
So Last check.
1-Ignore dividends . Only just make sure Consolidated p/l should not include the investment income?
2-Also you added that there is no cancellation of intra group dividend payables and recievables.Right?
1 Yes
2 I copy from my previous answer: “There is not even any effect on working W3 for dividends that are recorded as still payable / receivable even though there is an element of cancellation of Receivables against Payables for dividends declared but not yet paid)”
That tells me that I DID say there is cancellation of dividends payable in Receivables against Payables, and that is correct
Summarizing the thread:
1-Ignore dividends . Only just make sure Consolidated p/l should not include the investment income?
2-Intra group dividends payable/recievable will be cancelled.
It seems like we can leave the thread with this.
(Thank you )although the thread was over .
i wanted to re check with you.1-dividends recievable from associate .How it can be eliminated / cancelled in sofp? ( as it,s nature is also intra group balances with associate )
2- arent intra group balances with associates ignored ?
The Associate is NOT a group company
Never having ever been asked this before, I’m having to think it through!
When the parent acknowledges the dividend receivable (Dr Receivable, Cr Investment Income), there is nothing against which we can cancel that receivable so I’m thinking that it will be shown as an asset on the CSoFP
It will NOT be shown in the CSoI because we shall be showing as a single line entry in the pre-tax line of the consolidated statement “Our share of this year’s Associate profit AFTER tax” out of which the Associate is then going to appropriate a dividend
do you mean that in Csofp intra group balances with associate ignored ? ( including dividends recievable )
How can you have reached that interpretation from what I have posted?
I have clearly stated that (and I quote) “there is nothing against which we can cancel that receivable so I’m thinking that it will be shown as an asset on the CSoFP”
On the statement of profit or loss, we ignore the “investment income” shown in the parent’s own statement of profit or loss because we are taking into the consolidation the group’s share of the associate profit after tax
And there is no such thing as an intra-group balance with an associate! Once more, the associate is NOT a group company
dividends by subsidiary or associate ignored in C-p/l.
intra group balances of div recievable/ payable ( related to subsidiary) will be cancelled in C-sofp.
dividend recievable from associate will be shown as asset .[ignore meant there is nothing to cancel with so keep them where they are Here as an asset]
Query :
did i get it right? [ i apologize for communication issues .From my own experience, when we receive a dividend from our associate company we normally
Dr: Cash received/ dividend receivable
Cr: Investment in Associate
This is because the dividends paid by the associate is paid out of the retained earnings which we have already accounted for and increased our investment in associate; hence since the dividend is paid out, it must reduce the value of our investment.
Remember; when we record the share of profit from associate, we normallyDr: Investment in Associate, by that figure of share of profit
Cr: Share of profit from associate, by the same figure of profit recorded above.Gaudiano, why do you not debit cash and credit investment income in the parent’s records?
For the consolidation, ignore any investment income received / receivable as dividends paid / payable by subsidiary / associate – simply ignore them
For the csofp, both subsidiary and associate are shown as “cost + share of retained earnings – our share of any subsidiary impairment” (if nci is on full fair value basis or the whole of the impairment if nci is on proportional basis) “and – any impairment in the value of the investment in the associate”
In fact, your two entries above (the credit and the debit to the Investment in Associate) have the same effect as my “+ share of retained earnings ”
On balance, I think we are agreed – it’s just that your entries appear to go a long way round in getting there. But if that’s what you do in practice (remember, I’m an academic!) then fine. I believe that my entries would achieve the same end result
🙂
Hello Mike,
When the dividend is received, the parent records it by:
Dr. Bank
Cr. Investment in AssociateThe logic behind crediting the investment in associate is that the net assets of the associate decrease when it pays out dividends(dividends are paid out from profits).
So the parent debits investment in associate with its share of profit because it increases the net assets, LIKEWISE, It credits investment in associate with its share of dividend because it decreases the net assets.
Let’s consider the scenario that the dividends were actually reported on the income statement, as you suggested above (i.e. credit investment income); then, this means that the investing company (the parent), would recognize its share of the profits that the associate company had; and remember that dividends are distributed from the same retained earnings which the parent company has already recorded. The result would be that the same income would be included twice.
Hope this sounds more accurate; right?
No, because I have already pointed out (more than once on this thread!) that even though the parent records the receipt of the dividend from the associate in the parent’s investment income, that investment income is ignored when preparing the consolidation. The only entry on the Consolidated Statement of Profit or Loss in respect of the associate is to credit the consolidated pre-tax profit with the group’s share of the associate’s post-tax profit
So there’s no double counting!
I believe when you think about it you will realise nothing is double counted because in the case of a dividend paid out that it will be paid out from realised earnings of the associate.In reality dividends are merely distributions of capital.No real value has been created or destroyed in economic terms.As Mike Little indicates in earlier posts no adjustments are generally made on associates because of the lack of control of the parent company(associates lie outside the group).Therefore,Gaudiano, though I believe that your method would generally work in practical terms in most cases,it could cause problems where the percentage ownership in a subsidiary changes or in similar instances.
Thank you Jon, although I don’t really see where problems would arise with a partial acquisition or disposal
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Hi Mister,
I came across a question in F7 for consolidation. In the parent statements, there is an investment income of 160, and in the subsidiary’s statements, there is a note that subsidiary paid an interim dividend during the year of 200. Why in the consolidated statements of profit or loss, the investment income is nil?
Thank you.Because, when we consolidate, we ignore any intra-group dividends paid and received.
We treat the group of companies as though they were a single entity. If you can accept that, then you can also understand that a dividend paid by a subsidiary and received by a parent is the same as you paying money from your left pocket into your right pocket
On consolidation, we consolidate down to “profit after tax”
A dividend is an appropriation of some of the subsidiary’s profit after tax. So the profits out of which the dividend is funded are consolidated. Similarly, the nci share of the dividend from the subsidiary is allocated to them by crediting the nci with their share of the subsidiary’s profit after tax from which the dividend is appropriated
Ok?
Hi Mike,
I have a question here about the dividend payment from Sub & Associate.
In 2012 Jun past paper, question 1 (1) Robby acquired 80% of Hail, and at the beginning of the year, Robby received 2m dividend from Hail. This 2m has been credited to OCI.
In W3, Retained Earning Robby, “dividend from Hail 2m” was added to Retained earning of Robby.Why here include the dividend from subsidiary in Parent’s retaining earning? I don’t quite get it. Thank you
Because the consolidated retained earnings calculation working W3 starts with “H’s own (retained earnings according to H) ……” this is the retained earnings from the parent’s own records and they (should) include the dividends paid by the subsidiaries and the associates. If those dividends have not been recorded, then they need to be
Ok?
@mikelittle said:
Because the consolidated retained earnings calculation working W3 starts with “H’s own (retained earnings according to H) ……” this is the retained earnings from the parent’s own records and they (should) include the dividends paid by the subsidiaries and the associates. If those dividends have not been recorded, then they need to beOk?
Not quite. What does “Retained earnings from parent’ own record” mean? Does it mention the individual record of the parent?
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