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Dividend received by indian company from its foreign sub

(Guest)

Kindly guide on the following query:

Holding Company ABC (Indian Company) received dividend from its 100% foreign subsidiary. The dividend is disrtibuted from the past earnings og the subsidiary.

Queries:

1. How should this transaction be accounted in books of Holding and Subsidiary Company.

2. When consolidating, how will this dividend get eliminated.

Looks like a very lame question. pls guide

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6 Replies

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 29 March 2012

Mohan

On payment of dividend, the subsidiary company will pass following entry:

Retained earnings - debit

Bank account - credit

On receipt of dividend the holding company will pass following entry:

Bank account - debit

Dividend income - credit

On consolidation of holding company with subsidiary company following consolidation adjustment will be passed:

Dividend income - debit

Retained earnings - credit.

Let me know if you stil have doubts.

shivam gupta (Student) (142 Points)
Replied 29 March 2012

Dear Sir,

In case of consolidation of Foreign subsidiary, first we have to prepare Trial balance in Indian currency

& i m presuming that u already know the transalation Rules of AS11 & the difference arises dueto transalation will be booked as "Fluctuation in Foreign currency"

if the dividend received by holding Co. is out of pre acquisition profit then it will be deducted from Cost of investment (Cost of Control) as i m presuming that u know the concept of Pre & post acquisition profit

& if such dividend is received out of post acquisition profit then it should be transferred to Consolidated profit & loss A/c

(Guest)

Thanks for your response. Makes sense.

To sum it up:

1. Dividend income will get eliminated on consolidation (per entry No 3 posted by Sachin)

2. In my case, Sub is formed by the Holding company, hence there would be no question of reducing the carrying value of investment.

3. I will also have to pass entry for tax which Sub might have deducted as per the laws of land of Subsidiary.

4. Dividend Income will be shown as gross amount and tax deducted to be shown as expenses

5. Since dividend has been received from Foreign sub, i will have to account for Fluctuation in foreign currency as pointed out by Shivam

Pls point out if am missing out anything

(Guest)

@ Shivam, can you pls throw more light on AS 11 related thing

shivam gupta (Student) (142 Points)
Replied 29 March 2012

Dear Mohan ,

As u said in ur 4th point

"Dividend Income will be shown as gross amount and tax deducted to be shown as expenses"

I think , i should remind u that on dividend CDT will be applied & such tax is paid by the co. not by theshare holder

assume if Co. proposed to pay dividend of Rs. 50000 on which 10% CDT is to be charged then in that case dividend paying co. will pay 55000 RS. becoz Divident income is taxable in the hands of CO. who pays the dividend

so there will be no issue of Gross & Net Amount

shivam gupta (Student) (142 Points)
Replied 29 March 2012

@ Mohan

AS11 deals with the effect of changes in Exchange Rate

& It deals, how to translate foreign currency transaction into Indian currency

also provide how to translate balance sheet & p/l in case of Foreign branch & Companied

before going into some detail i wouldlike to tell u some definition which are as follows

Spot rate means the exchange rate of immediate transaction for example A co. purchase a laptop from America in 500$ at 2.12.2012. so the exchange rate(2.12.2012) of that day is called spot rate

Closing rate is the spot exchange rate at the end of the reporting period for example u r preparing financial statement of the co. for 31 march 2012.then exchange rate on 31 march 2012 will be Closing Rate

Exchange difference is the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.

Exchange rate is the ratio of exchange for two currencies.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Foreign currency is a currency other than the functional currency of the entity.

Foreign operation is an entity that is a subsidiary, associate, joint venture

or branch of a reporting entity, the activities of which are based or

conducted in a country or currency other than those of the reporting entity.

Functional currency is the currency of the primary economic environment

in which the entity operates.

Monetary items are units of currency held and assets and liabilities to be

received or paid in a fixed or determinable number of units of currency.

Net investment in a foreign operation is the amount of the reporting entity’s

interest in the net assets of that operation (Holding Subsidiary).

& i will write the ramianing things tomorrow ,