Which of the following statements is true regarding an investee that received a dividend distribution from an entity and is presumed to have little influence over the entity?
A.
The cash dividends received increase the investee investment account accordingly.
B.
The investee must adjust the investment account by the ownership interest
C.
The investment account is adjusted downward by the percentage of ownership.
D.
The investee must record the cash dividends as dividend revenue
Accounting Treatment for Investments with Little Influence:
When an investee has little or no influence over an entity, it uses the cost method (or fair value method, if applicable) to account for the investment.
Under the cost method, cash dividends received are recorded as dividend revenue rather than adjusting the investment account.
IIA Standard 2120 - Risk Management:
Internal auditors must ensure that financial reporting aligns with applicable accounting standards.
Applicable Accounting Standards:
IFRS 9 (Financial Instruments) and U.S. GAAP (ASC 320 - Investments in Equity Securities) state that dividends received should be recognized as income in the period received.
A. The cash dividends received increase the investee investment account accordingly. (Incorrect)
This applies to the equity method, used when an entity has significant influence (usually 20-50% ownership).
Under the cost method, dividend income is recognized as revenue, not as an increase in the investment account.
B. The investee must adjust the investment account by the ownership interest. (Incorrect)
Adjusting the investment account for ownership percentage is a feature of the equity method, not the cost method.
C. The investment account is adjusted downward by the percentage of ownership. (Incorrect)
A downward adjustment only occurs under the equity method when dividends exceed earnings, indicating a return of capital.
Under the cost method, dividends are recorded as revenue.
Explanation of Answer Choice D (Correct Answer):Explanation of Incorrect Answers:Conclusion:When an investee has little influence, dividends are recorded as revenue (Option D), following IFRS 9 and U.S. GAAP standards.
IIA References:
IIA Standard 2120 - Risk Management
IFRS 9 - Financial Instruments
U.S. GAAP ASC 320 - Investments in Equity Securities
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