Asked by Jaylin Johnson on Jun 08, 2024
Verified
Explain why dividends paid by subsidiaries out of pre-acquisition profits will result in impairment of the parent company's investment in subsidiary asset.
Pre-acquisition Profits
Earnings generated by a subsidiary prior to being acquired by a parent company, often considered in the determination of goodwill or investment value.
Subsidiary Asset
Assets that are owned by a subsidiary, which is a company controlled by another company (the parent).
- Identify how dividends are treated in financial statements and the effect they have on consolidation processes.
Verified Answer
DO
Dr. Osama RababahJun 09, 2024
Final Answer :
Dividends paid by subsidiaries:
- Where a subsidiary pays a dividend,it must be treated as revenue (previously dividends paid out of pre-acquisition profits were treated as a reduction in the cost of the investment).
- AASB136 now requires the investment in subsidiary to be tested for impairment when a dividend is paid and it is expected to result in impairment.
- Recording an impairment loss resulting from a payment of a dividend out of pre-acquisition profits will have the same effect as the previous treatment of such dividends as a reduction in the cost of the investment.
- Where a subsidiary pays a dividend,it must be treated as revenue (previously dividends paid out of pre-acquisition profits were treated as a reduction in the cost of the investment).
- AASB136 now requires the investment in subsidiary to be tested for impairment when a dividend is paid and it is expected to result in impairment.
- Recording an impairment loss resulting from a payment of a dividend out of pre-acquisition profits will have the same effect as the previous treatment of such dividends as a reduction in the cost of the investment.
Learning Objectives
- Identify how dividends are treated in financial statements and the effect they have on consolidation processes.