This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand how to account for dividends received from a subsidiary in the parent’s individual financial statements under FRS 102.
Members may also wish to refer to the following related helpsheets:
A question arises as to how dividends received from a subsidiary should be accounted for in the parent’s individual financial statements under FRS 102, where the parent accounts for its investment in the subsidiary at cost less impairment.
Where the dividend represents a return on a parent’s investment in a subsidiary (rather than a return of its investment), the dividend will usually be credited to the profit and loss account.
Under both the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409) and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410), the profit and loss account formats (format 1) include ‘Income from shares in group undertakings’. This is where such dividends received form subsidiaries would usually be presented.
FRS 102 paragraph 23.29 requires dividends to be recognised when the shareholder’s right to receive payment is established.
Where the dividend is a return of the investment, which leads to a diminution in value of the investment, for example, where a material dividend is paid to a parent shortly after a subsidiary is acquired, or where the dividend is one of a series of transactions designed to liquidate the subsidiary, there are two potential treatments:
- Credit the dividend to the profit and loss account (in the same way as for a dividend which is a return on the investment) and separately record an impairment write down of the investment in subsidiary; or
- Credit the dividend against the cost of investment in the subsidiary, reducing its carrying amount.
Whilst either approach is acceptable, and views may differ, the second approach appears to more faithfully reflect the substance of the transaction.
In some cases, more than one treatment may be appropriate, for example, where the dividend partly represents a return on the investment and partly represents a return of the investment which leads to a diminution in value of the investment.
In such cases careful judgement will be required and decisions should be clearly documented.
ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm accesscan discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.
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FAQs
Credit the dividend to the profit and loss account (in the same way as for a dividend which is a return on the investment) and separately record an impairment write down of the investment in subsidiary; or. Credit the dividend against the cost of investment in the subsidiary, reducing its carrying amount.
What is the treatment of dividend paid by subsidiaries in consolidation? ›
Subsidiaries pay dividends to their owners (Parent and NCI). Any payments made between subsidiaries and parents are classed as intra-group transactions, therefore they need to be removed.
How do you account for dividends received? ›
How to account for dividends
- Record the dividend as a liability. Accounting specialists record dividends as a liability under standard accounting procedures. ...
- Debit the company's retained earnings account. ...
- Credit the company's dividends payable account. ...
- Distribute the dividends. ...
- Record the deductions on the date of payment.
The equity method for subsidiary accounting
Parent companies use the equity method to record the revenue from their subsidiary company (or companies), which goes on their non-consolidated income statements. The parent company's investment is initially recorded at cost.
What is the journal entry for dividend received? ›
Assuming that the company uses the fair value method and not the equity method or consolidation method, then the company would record dividend income from an investment by debiting cash and crediting dividend income. Dividend income would be a non-operating gain in the income statement.
What is the double entry for dividends received? ›
So, when dividend is received by X, the double entry is firstly Dr Cash; Cr Dividend (other income), and at the end of year it will be Dr Dividend; Cr Retaining Earnings? 2. If Company M issues shares, it will get the money in return from the investors (who paid for the shares).
Is dividend received from subsidiary taxable? ›
dividends are generally exempt from tax in the hands of the recipient company; withholding tax is not charged on distributions; and. relief is available for capital gains tax on the disposal of wholly owned trading subsidiaries.
What happens to dividends in consolidation? ›
In the consolidated statement of profit or loss, any dividend income received from the associate is replaced by bringing in one line that shows the parent's share of the associate's profit. This is presented as 'Share of profits of associate' as a new heading immediately before the consolidated profit before tax.
How will you treat the dividend received from the subsidiary if the dividend is paid out of pre acquisition profit? ›
Answer and Explanation:
So, the subsidiary company pays dividends to its shareholders from pre-acquisition profits. The journal entry for this is debiting the bank account and crediting the shares in a subsidiary company. These dividends are treated as capital receipts by the holding company.
How to treat dividends received in financial statements? ›
Cash or stock dividends distributed to shareholders are not recorded as an expense on a company's income statement. Stock and cash dividends do not affect a company's net income or profit. Instead, dividends impact the shareholders' equity section of the balance sheet.
The dividends declared and paid by a corporation in the most recent year will be reported on these financial statements for the recent year: statement of cash flows as a use of cash under the heading financing activities. statement of stockholders' equity as a subtraction from retained earnings.
Where do dividends received go on a balance sheet? ›
Balance Sheet: Dividends paid reduce the “Retained Earnings” account under the “Equity” section. When dividends are declared but not yet paid, they may appear as a “Dividends Payable” under “Current Liabilities.”
What are the accounting rules for subsidiaries? ›
Since a subsidiary is a separate company, you must maintain separate accounting records for it. Your subsidiary must have its own bank accounts, financial statements, assets and liabilities. You must accurately track any personnel and expenses split between the parent and subsidiary.
How to treat dividends in consolidation? ›
Intra-group Dividends
When a subsidiary proposes a dividend, the parent will record its share of the dividend in the dividend receivable account. In the consolidation process, this dividend receivable account must be eliminated against the dividend payable account in the books of subsidiary.
What is the accounting treatment of wholly owned subsidiary? ›
Accounting for a Wholly-Owned Subsidiary
From an accounting standpoint, a wholly-owned subsidiary remains a separate company, so it keeps its own financial records and bank accounts and tracks its own assets and liabilities. Any transactions between the parent company and the subsidiary must be recorded.
Where do dividends paid by a subsidiary to the parent company appear? ›
Cash dividends received from subsidiaries should be classified within operating activities or investing activities on the statement of cash flows, depending on whether they are a return on investment or a return of investment.
How to record dividend paid to parent company? ›
To record a dividend, a reporting entity should debit retained earnings (or any other appropriate capital account from which the dividend will be paid) and credit dividends payable on the declaration date.
What is payment of dividend by the subsidiary company? ›
Subsidiary Dividend Payment means, with respect to any Subsidiary of the Company, dividends (in cash, Property or obligations) on, or other payments or distributions on account of, or the setting apart of money for a sinking or other analogous fund for, or the purchase, redemption, retirement or other acquisition of, ...
