Chapter 5: Dividend income

A distribution from an investee could be either a return on capital (dividend income) or a return of capital (a reduction of the cost of investment). Judgement should be applied in determining the appropriate accounting treatment, based on the substance of the transaction.

Reallocation of investment balances in subsidiaries As part of a group reorganisation, a subsidiary (S) might distribute an investment that it holds in another subsidiary (I) up to its parent (P). If the substance of this distribution is judged to be a return of S’s capital to P, rather than a dividend from S to P, then P would reallocate a portion of the carrying value of its investment in S to a separate investment in I. One way to achieve this would be to base the reallocation on the relative values of I and S. If the distribution was judged to be a dividend, then P would record dividend income at the fair value of I. In either case, P might also need to test its investment in S for impairment.

An investor using the cost method or in accordance with IFRS 9 recognises dividends received from a subsidiary, joint venture or associate in profit or loss in the separate financial statements when the entity’s right to receive the dividend is established. Dividend income is in the scope of IFRS 9 and would be recorded at fair value.

An investor using the equity method in its separate financial statements for subsidiaries, associates and joint ventures reduces the carrying amount of the investment by any dividend received, rather than recognising it as income in profit or loss.

Bonus issue by subsidiary

An investee entity (subsidiary, associate or joint venture) might decide to issue new shares to its parent, for no additional consideration, by capitalising reserves (if permitted by local law) into share capital.

The parent makes no entries in its separate financial statements. No gain is recognised, and the carrying amount of the investment in the subsidiary is not changed. No distribution is deemed to have occurred. IAS 27 requires the receipt of a distribution in order for the parent to record income from the investment.