Equity Method and Proportionate Consolidation Method - Shareholders Equity

CFA Level II
#1

Hi,

The CFA Curriculum states that Shareholders Equity will be the same under both method. How is this the case? Both on the Acquisition date and in periods after the Acquisition. Thanks for the help

#2

Under the equity method we show only the (net) investment in the subsidiary as an asset. There is nothing in Liabilities nor Shareholders’ Equity related to the investment (apart from the effect of the investment on Net Income, which flows into Retained Earnings).

Similarly, in consolidation there is nothing in Shareholders’ Equity related to the investment (again, apart from the effect of the investment on Net Income, which flows into Retained Earnings).

#3

Does this mean ROE would be equal under both the equity method and acquisition method?

A third party source says that equity would be LOWER and that ROE would be HIGHER under the equity method compared to acquisition method. The same source also says you ignore the SE of the aquiree as you mentioned… hmm…

#4

Also, with consolidation wouldn’t you add minority interest and the value of your stake in the aquiree when computing total SE? So wouldn’t that mean total SE would be greater under consolidation compared to equity?

hmm…

#5

You add the minority interest in FULL consolidation (not partial) not partial. For that reason, under FULL consolidation, shareholders equity is higher. Not partial.

#6

full consolidation you won’t have any minority interest cause you own 100%. Partial consol you have minority interest and your equity will be higher…

pls correct me if I misunderstanding something?

#7

It depends on how you define equity.

If you include minority interest, they’ll be different.

If you exclude minority interest, they’ll be the same.

#8

Hmm… nice.

Thank you!

#9

I thought proportionate consolidation is no longer allowed? I just had a question about it and now it’s either Equity Method or Acquisition Method. Ie instead of proportionate consolidation you will be required to use equity method. Can anyone confirm?

#10

Yes, that is correct. Proportionate consolidation is no longer allowed. You would use the equity method for joint ventures.

That doesn’t mean that questions on proportionate consolidation won’t be on the exam though. If it’s still on the curriculum it’s fair game… hmm…

#11

Just like pooling of Interest method, no longer used in practical life but in the curriculum and may show up

#12

My pleasure.