Hey, don’t have books with me and can’t remember how to account for dividends with acquisition method and proportionate consolidation? can anyone give a summary? Thanks much
Think intercompany transactions are ignored?
Consolidation assumes you have control - think about 100% consolidation - if you have control over dividends, and pay them to yourself, what have you accomplished?
Ok so imagine you have a 50% stake in company X, which pays $100 of dividends (ie $50 that are ‘yours’). Are you saying that under the acquisition method you’d treat it like you were paying it yourself? What about proportionate consolidation?
Thanks so much!
With a 50% stake in the firm, do you have control over it? Remember, that’s the key between acquisition and equity method. If you are reporting it under the acquisition method you’re assuming that you have control, and thus control the dividend policy. Does it make sense to record something you pay back to yourself? No.
Although someone can correct me if I’m wrong - the minority interest is adjusted as if it were reported under the equity method. Meaning, if the minority interest owns 15% of X, then the minority interest account is adjusted by 15% of X’s income - 15% of the dividends issued.
Now, logically, does it make sense to issue a dividend if you have control over a firm? I’m not sure - my guess is that the parent company would want to keep the earnings in the hope of someday acquiring 100%.
Proportionate consolidation - I’m not completely sure the IFRS treatment. Under GAAP, proportionate consolidation = equity method and is treated as a return of capital.
I am pretty sure that you don’t account for intercompany transactions in consolidation or proportionate consolidation methods. The reason is under equity method, investment account is maintained over time, means once it is there on the balance sheet of the parent, the only thing going to vary each year is earnings and intercompany transactions, at least this is what I thought. I don’t think you acount for change in PPE and other assets except inventory on a year to year basis, at least this is not mentioned in the books. Yet you do consolidate each year under two other methods so earnings and inter company transations will be reflected in the statements each year.
Now while answering this question, I got one more question, why is change in asset and liabilities is not acounted under equity method?