Question

Issue 5:

My final question relates to when a company within the Group pays or declares a dividend. To my best understanding, all dividends paid and declared by our Parent company must be eliminated, however we do not need to worry about the Subsidiary’s dividends as this is all controlled by the Parent company. Please confirm if my understanding is correct with an explanation.

Answer 1

KEY POINTS

Dividend received by the holding company from its subsidiary out of pre-acquisition profits is treated as capital receipt.

• Thus the holding company deducts the amount of dividend received out of pre-acquisition profits from the balance of shares in subsidiary company account.

Dividend received out of post acquisition profits is treated as a revenue receipt.

•   Because such a dividend does not change the cost of shares of the subsidiary company and the holding company’s share of capital profits, it will also not alter the cost of control or capital reserve on acquisition of shares.

The holding company may receive interim dividend from the subsidiary company; if such an interim dividend is to be apportioned between pre-acquisition period and post acquisition period, it should be assumed that the interim dividend has been earned evenly throughout the year.