I have a question for number 26 in Intercorporate Investments. It asks for the long term debt to equity ratio for the equity method and the consoliation method. For the consolidation method the book uses 1000/1750 The 1000 is the combined debt of the 2 comanies The 1750 is the 1430(equity of Acquirer ex. Nina ) + 350 the noncontrolling interest. In sch it say the non controlling interest amt should be .50 (amt not owned) * equity of acquired company (boswell), which in this case would be 580 =(535 com stock +45 RE) and the noncontrolling interest would be .50 *580 =290 But instead of the 290, CFA uses 350 as the noncontrolling interest amt, which is the amt that the acquiring co (Ninmount) paid to buy and investment in the acquired co (boswell).
Please help in answering this Q
You should note the following point regarding the treatment of non controlling (minority) interests on the balance sheet. IFRS and U.S GAAP have converged on how non controlling interests are classified on the balance sheet. Both now require non controlling interests in consolidated subsidiaries to be presented in consolidated balance sheet as a separate component of stockholders equity. Previously companies using IFRS reported non controlling interests as equity, whereas companies reporting under U.S GAAP reported non controlling interests either as liabilities or between liabilities and equity(mezzanine section). Therefore, as a result of this adjustment Equity reported under the acquisition/comcolidation method will be higher as compared to the equity reported under equity method and proportionate consolidation method. Schweser has written in Book 2, Page 30 that all three methods report the same equity.This is an incorrect statement. Hope that explains
What I am actually asking is, How they did come up with that number 320? I realize that amt is the total amt they paid to own part of it. But schweser says minority interest is supposed to calced (percentage of co owned *equity of co you want to invest in). If this is so the number should be 290. I am just trying to understand how they came up with the 320 number
How I understand this: you combine assets and liabilities at fair value plus any goodwill (in CFAI example full goodwill I think) and to have A=L+E you need to have minority int also booked with same principles, in this case because they bought 50pct it is the same amount they paid. Say you (X) pay cash 100 for 50pct of a company (Y) and it is equal to fair values of assets and liabilities (so zero goodwill): you combine in books of X 100 % of assets and liabilities of Y at fair values (say 300 assets and 100 liabilities) assets are minus 100 cash plus 300 assets = + 200 liabilities are plus 100 to have A=L+E you need to add 100 to minority interest when the goodwill is not zero, then there is the full or partial goodwill issue
this is full consolidation… license was 30 with 50% ownership (based on equity method) - how much would it be with the full consol? 60$…
so your saying i should add 30 (licence/goodwill)+290(% of book value bought)=320
equity investment = 320 is removed when you consolidate you have total value of ninmount=2140 remove 320 add 1170 of Boswell. then add the goodwill from licenses = (320-290) = 30 for 50% of licenses now with consolidation since you are getting 100% of licenses => value = 30/0.5 = 60 so total Assets = 2140-320+1170+60=2950
oh, what cpk said is correct. you should note when you calculate goodwill, you have to calculate fair value of net asset, which is implied by the “purchasing price” and the “ownership percentage” e.g. you buy a 50% stake by $100, then the implied fair value of the firm’s net asset(tangible) is 100/50%=200, base on which you can go on for goodwill.
the licenses are not goodwill
some licenses are not considered as tangible assets if they don’t have a expiry date. according to the new growth theory, the knowledge asset should not depreciate
I am very confused at this point, all I am asking is: how did they come up with 320 as the minority interest? The problem is CFA say the min interest is 320, how did they calc that amt?
in this case I recommend you to read CFAI Book 2 page 43, 6.4.3 Noncontrolling (Minority) Interests plus maybe CFAI Book 2 page 38, 6.2.1 and page 39, 6.2.5 in the example the goodwill is zero
it isn’t goodwill in this question. it is the fair value of licenses …