However, when reporting financial information, the parent company is required to submit financial statements that combine their information with that of their subsidiaries.These documents are called consolidated financial statements and allow the health of the group to be assessed as a whole, rather than piece-by-piece.The income of the subsidiary in future years will also be added along with the income of the parent company and the balance brought forward on the income statement, so that a total figure for group income is carded forward at the end of each year. If the dividend is proposed but will not be paid until after balance sheet date, it will appear as a current liability in the group balance sheet.The treatment of dividends Dividends may be paid either by the parent company, or the subsidiary, or by both companies. Dividend paid by Subsidiary Ltd If S Ltd declares a dividend it will be paid to its sole shareholder-P Ltd.the drain on its cash resources is only a net £4 m.The above covered the situation in which the dividend paid by the subsidiary is declared and paid out of income arising after the date of the acquisition.The dividend received by the parent is regarded as distributable to the shareholders of P Ltd.Dividends paid out of pre-acquisition income A dividend paid by a subsidiary to its parent and agreed to be paid out of income existing at the time of takeover (pre-acquisition income) is treated quite differently.
These arise mainly because of inter-company trading between a parent and its various subsidiary companies, which if not eliminated during the consolidation process may lead to 'double counting'.
Organizing Your Information Setting Up a Worksheet Combining Financial Statements Eliminating Duplicate Values Community Q&A Many large companies are partially or entirely made up of smaller companies that they've acquired throughout the years.
After their acquisitions, these smaller companies, or subsidiaries, may have remained legally separate from the large corporation, or parent company.
In the usual case of a subsidiary taken over during its financial year either proper final accounts can be specially prepared at the date of acquisition so that pre- and post-acquisition income can be distinguished or an apportionment can be made on a time or some other rational basis to determine the division of pre- and post-acquisition income.
A consolidation may include a subsidiary which is taken over mid-way during the parent's financial year and the income of the subsidiary in that year may have to be split as to 50 per cent prior to acquisition and 50 per cent after acquisition.