a couple of concepts

CFA Level II
#1

Hi Guys,

I am reviewing my own notes and found some contradicting points that confused myself.

Please help me clarify that:

  1. “low alpha country benefit more from capital deepening”? (assume both countries are developing)
  2. Total Equity under acquisition method = Parent equity + non-controlling interest

Thanks in advance!

#2

in the acquisition method you are consolidating the entire balance sheet of the target. You are taking on all of their assets and liabilities (even though you do not own all the equity) so you need to report the non-controlling interest on your balance sheet in the equity section otherwise your balance sheet will not balance.

Remember: A = L + E If you are consolidating A & L on your balance sheet unless they are the same you will need to adjust E as well

#3

  1. Capital Deepening is more beneficial for the country that has the lower capital to labor ratio (hence, “alpha” was referring to Capital in your notes.)

  2. Under the acquisition method, the consolidated balance sheet, under the equity component, will include the Parents total equity and the subsidiaries portion of equity that the parent does not own, i.e. Non-Controlling Interest. Under IFRS, use either Full Goodwill (measures non-controlling interest at fair value) or partial goodwill (the proportionate share of the subsidiaries identifiable net assets). Under US GAAP, firms must use the full goodwill method.

Hope that helps, and I am not missing anything or explaining incorrectly.

#4

Thanks guys!