Ind AS 27: Dividends and Group Reorganisation in Separate Financial Statements

Understand Dividends and Group Reorganisation in Separate FS

Key rules to remember

Dividend income timing

Recognise in P&L when the right to receive the dividend is established

Applies to dividends from subsidiaries, joint ventures and associates in separate FS only when the investments are accounted for at cost or in accordance with Ind AS 109. Under the equity method, the dividend reduces the carrying amount instead. Cash receipt date is not the test.

Dividend presentation

Cost or Ind AS 109: Dr Dividend receivable / Cr Dividend income (P&L). Equity method: Dr Dividend receivable / Cr Investment

P&L recognition applies only when the investment is at cost or per Ind AS 109. Do not credit the investment account in that case; it stays at cost. Under the equity method, the dividend reduces the carrying amount of the investment.

Cost of investment in a new parent reorganisation

Cost = New parent's share of the carrying amount of the equity items in the original parent's separate FS at the reorganisation date

Not the fair value of shares issued. Equity items usually means share capital, reserves and other equity items.

Conditions for the reorganisation rule

(a) New parent obtains control of the original parent by issuing equity instruments in exchange for existing equity instruments of the original parent; (b) assets and liabilities of the new group and the original group are the same immediately before and after; (c) owners of the original parent have the same absolute and relative interests in the net assets of the original group and the new group immediately before and after

All three must be met. If any fails, apply the general cost rules, for example fair value of consideration.

Impairment on dividend

Consider an impairment test of the investment if (a) the dividend exceeds the total comprehensive income of the investee in the period the dividend is declared, or (b) the carrying amount of the investment in the separate FS exceeds the carrying amount in the consolidated FS of the investee's net assets, including associated goodwill

These are indicators of impairment for investments in subsidiaries, JVs and associates. They are indicators, not automatic write-downs.

How to solve Dividends and Group Reorganisation in Separate FS questions

1. 1Identify whose books you are in. Confirm that the question asks about separate financial statements, not consolidated ones.
2. 2Note the accounting policy for the investment: cost, Ind AS 109, or the equity method as described in Ind AS 28. Under the cost method, dividend recognition is as described below.
3. 3For a dividend, find the date the right to receive is established: shareholder approval for a final dividend or board declaration for an interim dividend. Compare it with the reporting date.
4. 4Recognise dividend income in profit or loss for the full declared amount that belongs to the entity. Compute it as the percentage held times the total dividend.
5. 5Check whether the dividend is an impairment indicator. Compare the dividend with the investee's total comprehensive income for the period. Also compare the investment's carrying amount in the separate FS with the carrying amount in the CFS of the investee's net assets, including goodwill.
6. 6For a reorganisation, test the three conditions one by one. If all are met, go to the next step. If not, use the general cost rules.
7. 7Take the original parent's equity items from its separate FS at the reorganisation date. Multiply by the new parent's share. That is the cost of investment.
8. 8State the answer with the paragraph logic and a one-line reason, for example that the group's economic substance is unchanged.

Quickest way: Two-question shortcut

Common mistakes in Dividends and Group Reorganisation in Separate FS

• Recognising dividend income when cash is received.

  Students link income with cash from the old accounting habit.

  Fix: Use the date the right to receive is established, such as shareholder approval of a final dividend. Accrue a receivable if cash comes later.

• Reducing the carrying amount of the investment for a dividend received from a subsidiary that is held at cost or under Ind AS 109.

  Students carry over the equity method or consolidation logic, where dividends reduce the investment or are eliminated.

  Fix: In separate FS under the cost method or Ind AS 109, the dividend is income in profit or loss. The investment stays at cost unless impaired. Dividends reduce the carrying amount only if the entity has chosen the equity method as described in Ind AS 28.

• Taking the cost of investment in a new parent reorganisation at the fair value of shares issued.

  Students apply the general rule for share-for-share exchanges.

  Fix: If the three conditions are met, use the carrying amount of the new parent's share of the original parent's equity items.

• Applying the reorganisation rule without checking the conditions.

  Students see the words 'new parent' and jump to the answer.

  Fix: Check each condition: equity-for-equity exchange, same group assets and liabilities, and same absolute and relative owner interests. Failing any one means the rule does not apply.

• Using total equity of the original parent from the consolidated statements.

  Students pick the figures that are easiest to find in the question.

  Fix: The rule refers to the equity items in the separate financial statements of the original parent. Use those carrying amounts.

• Ignoring impairment when a dividend is large.

  Students treat dividend as pure income and stop.

  Fix: Add a line that a dividend exceeding the investee's total comprehensive income for the period is an indicator, so test the investment under Ind AS 36. Another indicator is the investment's carrying amount in the separate FS exceeding the carrying amount in the CFS of the investee's net assets, including goodwill.

Worked examples