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What disclosure treatment shall be made by a parent company regarding bonus shares received from its subsidiary?


What disclosures and treatments shall be made by a parent company regarding bonus shares received from its subsidiary?

asked Mar 8, 2017 in IAS 1 - Presentation of Financial Statements by Abdul Qayyum

1 Answer

0 votes
If the subsidiary company issues bonus shares out of pre-acquisition profits, such an issue will not alter the consolidated balance sheet.

Goodwill or capital reserve on acquisition of shares does not change because although the paid up value of the shares held by the holding company increases, the holding company’s share in the pre-acquisition is reduced by an identical amount because of transfer of pre-acquisition profits to Equity Share Capital Account.

Thus, the total of paid up value of shares held by holding company and share in capital profits of the subsidiary company remains unaltered; the holding company gets the bonus shares without any fresh payment hence the cost of investment also remains unaltered. The result is that there is no change in good will or capital reserve on acquisition of shares.

Minority interest also remains the same because although the paid up value of the shares held by minority shareholders increases, minority shareholders’ share in the pre-acquisition profits decreases by an identical amount because of the reduction in the pre-acquisition profits due to issue of bonus shares.

If the subsidiary company issues bonus shares out of post-acquisition profits, it will reduce cost of control or increase capital reserve. It happens because such an issue of bonus shares increases the paid up value of shares held by the holding company without a change in the cost of investment and the holding company’s share in pre-acquisition profits.

Such an issue of bonus shares reduces the post-acquisition profits. Hence holding company’s share in post-acquisition profits also goes down.

Minority Interest does not change by the issue of such shares. Although minority shareholders’ share in post-acquisition profits decreases, the paid up value of shares held by the minority share­holders increases by an identical amount. The result is that minority interest remains unchanged.
answered Mar 8, 2017 by umarhussainia Level 5 Member (11,320 points)


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