TREATMENT OF DIVIDEND :

Dividends may be received out of capital or revenue profits of the subsidiary company. Dividend received by the holding company from the capital profits of the subsidiary company are credited to investment in shares of the subsidiary account thereby reducing the cost of control or increasing capital reserve.

On the other hand, dividend received out of the revenue profits (i.e., post-acquisition profits) are treated as income and credited to profit & loss Account by the holding company. If dividend declared partly out of capital profits (i.e., pre-acquisition profits) and partly out of revenue profits (i.e., post- acquisition profits), the dividend received is divided into two parts in proportion to its declaration out of capital profits and revenue profits. The dividend pertaining to the first part (i.e., capital profits) is credited to Investment Account reducing the cost of control or increasing the capital reserve and dividend pertaining to the second part (i.e., revenue profits) is credited to profit and loss Account or surplus account.

It may be noted that in the absence of information whether dividend has been declared out of pre-acquisition or
post-acquisition profits, it is assumed that dividend is out of profits for the year for which the dividend is declared.

If the dividend has simply been proposed by the subsidiary company and appears as ‘Proposed Dividend’ in its Balance sheet, holding companies share of such dividend will appear with the Surplus or Profit & loss Account balance in the consolidated Balance sheet and share of such dividend belonging to minority shareholders will be added to minority interest. Proposed dividend need not be shown in the consolidated Balance sheet because it has been added to the minority interest and profit & loss Account balance of the holding company. If proposed dividend is not given in the Balance sheet of the subsidiary company or directors of this company have not appropriated the profits for proposed dividend, then the following procedure is followed:

(i) Calculate the cost of control and minority interest etc. in the usual manner without any adjustment for
the proposed dividend.

(ii) Deduct from minority interest its share of proposed dividend and show the same as a separate item in
the consolidated Balance sheet.