JUNE 2012 Q1 (A) DIVIDENDS RECEIVED FROM SUBSIDIARY.

Hi

In the consolidated statement of profit or loss, intra-group dividends received are correctly omitted. Similarly, on the consolidated statement of financial position, any intra-group dividends declared bit not yet paid will NOT be shown neither as an asset (receivable) nor as a liability (payable)

Of course, the non-controlling interest element of any dividend declared but not yet paid by the subsidiary WILL be shown as a current liability.

“so is that the reason we don’t eliminate the dividends?” No, that’s not the reason. If you were to go back to your F7 notes, you will see in working W3 Consolidated Retained Earnings that in fact we DO account for dividends declared but not yet paid within the individual company retained earnings column.

The appropriate cancellation is the receivable element against the part of the payable dividend that is paid to the parent (or within the group) leaving just the nci element as a payable.

But the accounting for receivable into retained earnings and payable from retained earnings is NOT cancelled

Do you remember the working W3 “song”? It goes like this:

H’s own +
H’s share of S post-acq retained –
goodwill impaired since acquisition (just our share)

That line “H’s own” is the retained earnings of the parent in the parent’s own financial statements and, of course, that will correctly include the dividend from the subsidiary

Is that better or are you still confused?

“The dividend payment is self-cancelling.” could be misinterpreted.

There is no intra-group dividend INCOME shown in the consolidated profit or loss (the dividend payment is not shown as an expense in the profit or loss – it’s shown as a deduction from retained earnings in the statement of changes in equity)

So when the parent receives (or anticipates and accounts for) the parent’s share of the dividend from the subsidiary, the parent correctly credits it in its own profit or loss account as an income and debits cash (or receivables if it has not yet been actually received)

But when we come to consolidate, because the parent consolidates the parent’s share of the subsidiary’s PROFIT AFTER TAX, that figure for profit is the source from which the subsidiary declares its dividend.

Coming down the consolidated statement of profit or loss, we add together revenue, cost of sales, distribution costs, administrative expenses, finance costs, finance income (but not intra-group finance income), taxation and thus, with the exception of the intra-group finance income, we have added together the parent’s profit after tax with the subsidiary’s profit after tax …… and it’s from that subsidiary profit after tax that the parent is going to get its share of the subsidiary dividend

Therefore, to include within the consolidated profit or loss account the intra-group dividend from the subsidiary will be to include that amount twice – once as finance income and again as part of the subsidiary profit after tax.

And that’s why, on consolidation, we ignore that intra-group dividend

Is that better?

Good – keep posting when you get stuck

Your understanding is perfect. No difference to the SFP workings.

(Bear in mind that these kind of mechanical elements of consolidation are tested in FR as opposed to SBR).