I’m confused with one of the Schweser Session Q’s. A U.S. company buys exactly 50% of another company, and the question doesn’t say whether a ‘controlling intrest’ is achieved. Do we use Equity Method, or Consolidated Method???
I doubt you will get a question like this on the actual exam. I think it will be pretty clear if their is a controlling interest. When schweser has set up questions with 50% ownership it has been done to compare the different methods using the same set of data (at least the examples I have seen).
I agree, major gray area, but I believe the CFAI text says <20% market, 20-50 inclusive equity, and >50% consolidation as 50% isn’t fully controlling, 51 would be required to have complete override. Of course these are just the technical guidelines and circumstances and judgement of level of control are the real determining factors.
The proportion consolidation method can be used if 50% ownership or said joint venture. HOWEVER, proportion consolidation is not allowed under US GAAP.
can you tell the page number of your question
oversun Wrote: ------------------------------------------------------- > The proportion consolidation method can be used if > 50% ownership or said joint venture. HOWEVER, > proportion consolidation is not allowed under US > GAAP. Nobody said anything about proportionate consolidation.
If I saw any such question on the exam… I would think Equity Method!!
Not in the books. Online Session test… “In addition, unknown to Zimmerman, the management of Montserrat is currently considering the acquisition of another smaller competitor, Hometown Homes. Montserrat’s proposed $25 million cash offer to the owners of Hometown represents approximately a 50% stake in the company.” Here is the question: If Montserrat purchases the proposed $25 million position in Hometown Homes, which of the following accounting methods for intercorporate investments should be applied? A) Cost method. B) Market method. C) Consolidation method. D) Equity method. Your answer: D was incorrect. The correct answer was C) Consolidation method. A purchase that represents an ownership stake of 50% or more in another entity represents a controlling influence of the acquiring company over the acquisition, and should be accounted for using the consolidation method. Are we just to assume, if not given the degree of influence, in the United States, that 20-49.9% = Equity Method, and 50% or greater is consolidation? This is so annoying
50% -> consolidation (control in the above situation) if joint venture however if two companies purchase 50% each (no control) it’s equity method in US GAAP and proportional consolidation International GAAP.
Crux of what is mentioned in CFAI Text: When just the percentage is given without the mention of the ‘Degree of Influence’ then stick with the % rule which says: (<20%) SFAS115 i.e cost or market (20-50%) Equity (>50%) Consolidation. But remember that ‘Degree of Influence’ criterion takes precedence over the % rule i.e No significant influence: SFAS115 i.e cost or market Significant influence : Equity (even if ownership was just 10%) Control : Consolidation
steveyzerman Wrote: ------------------------------------------------------- > Not in the books. Online Session test… > > “In addition, unknown to Zimmerman, the management > of Montserrat is currently considering the > acquisition of another smaller competitor, > Hometown Homes. Montserrat’s proposed $25 million > cash offer to the owners of Hometown represents > approximately a 50% stake in the company.” > The questions says appoimately 50% so you are still left in the air, but it does mention that it is an AQUISTION bid. This indicated control…go with consolidation.
ahhhh…thank you.
steveyzerman Wrote: ------------------------------------------------------- > That’s what I thought…wouldn’t the above rules > then lead to answer D in the question posted? control -> consolidation -> C
I dont have access to the Schweser now to look up the question, but from what you mentioned in your ques… Go for “Equity”…since “buys exactly 50% of another” as per % rule will lead to Equity method (considering that degree of influence is not mentioned in the ques).
Stop driving yourselves nuts over this. The CFA exam will be explicit enough in providing info on % owned, whther or not it is a JV, whether or not control exists, etc. so that you will be able to answer the question, provided that you understand the rules. Don’t get hung up on the limitations of Schweser questions.