Reading 19 CFAI Question 1 (page 159) asks for b4 tax contribution from a 19% passive investment entity. In the answer, 19% of the dividend is all that is taken into consideration. My questions are: Is 19% of Net income not supposed to be taken into account and the dividend netted off that amount? Is dividend b4 tax or after tax, if after tax why then is it included since the quetion says EBT? Please help.
Hi, the treatment which you descibed in your post, i.e. taking a proportionate share of the investee’s results to your own income statement is appropriate for associates - companies over which you exercise significant influence (usually deemed to happen when you cross the 20% shareholding threshold).
In this case, the investment is described as being passive (significat influence over the investee is not present, nor is control), which means that is should be accounted for as a simple equity financial asset (available-for-sale financial asset to be more precise). When this is the case, your income statement can only reflect the dividens received from the investee (assuming there is no disposal or impairment).
How come in this question you did not include the rise of 2 million of the stock’s market value in the EBT? I thought for available for sale securities under IFRS the appreciation of the market value of the security is included in the net income.
AFS gains/losses bypass income statement and go directly to OCI. Gains/losses are recognized on the I/S for HFT securities and flow to the B/S via retained earnings.