A Reconsideration of Consolidation Accounting Requirements and Pre-acquisition Dividends

Abstract

This article considers the consolidation accounting consequences of the International Accounting Standards Board's decision to replace the cost method of accounting for investments in subsidiaries with a new model that requires the recognition of dividend revenue for distributions received or receivable from pre-acquisition profits. The article shows that the recognition of pre-acquisition dividends as revenue with a potential indication of impairment causes problems to consolidation accounting procedures and may reduce the information content of consolidated financial statements. The highlighted problems relate to the elimination of the investment asset against the equity of the subsidiary and the definition and measurement of non-controlling interest. A review of the due process relevant to the replacement of the cost method indicates that the standard setter may have paid insufficient regard to accounting concepts and principles.