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Why does the equity method record dividends received from an investee as a reduction in the investment account, not as dividend income?

Why does the equity method record dividends received from an investee as a reduction in the investment

account, not as dividend income?

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Question added by Mohammad Iqbal Abubaker , Jahaca Pty Ltd - Accounts Administrator , Jahaca Pty Ltd - Accounts Administrator
Date Posted: 2017/03/05
Khalid Zafeer
by Khalid Zafeer , Accounts Receivable , Aflak Electronic Industries Co.

In reflecting the close relationship between the investor and investee, the equity method employs accrual accounting to record income as it is earned by the investee. The investment account is increased for the investees earned income and then decreased as the income is distributed, through dividends.

Frank Mwansa
by Frank Mwansa , ACCOUNTING LECTURER , FREELANCER

Investors do not treat dividend as revenue under the equity method. Instead, the investor subtract the cash dividend amount from the investment carrying amount. This recognizes that the value of the  investment has decreased by the cash distribution since the investor immediately records this effect on its balance sheet, I would constitute double counting to also book the the dividend as revenue.

Obisike Emezi
by Obisike Emezi , Finance/Accounts Manager , Outcess Solutions Nigeria Limited (formerly Customer Contact Solutions Nigeria Limited)

I agree with Mwansa because accrding to IAS (revised) an equity accounted investment reduces by dividend recieved while share of profit (increases it) and losses (reduces it).

Since such an investment is an asset, then any reduction in the value will likely increase another asset, in this case, cash. Hence the double entry will:

 

                                               DR Cash (dividend received)

                                               CR Carrying amount of investment.

This is a matter of one asset reducing and another one increasing by the same amount.