CFAI Vol II, Rdg 23, ECO #30, solution pg 187, balance sheet pg 183 In calculating Beginning Total Asset Turnover using the Equity Method, I’m not understanding how to calculate total assets. The solution is 950/2,140. 2,140 is simply NinMount’s Total Assets and I’m wondering Why not add 1/2 of Boswell’s total assets to the denominator 2, 140? Also, in calculating the same thing but with Consolidation, the solution is Assets = 2,140 -320 +1,070 + 60. Why does the 320 investment in Boswell have to be removed from Assets? And why does 60 get added - b/c it was previously unrecorded?
- Equity method: Only the proportional share in Boswell held by NinMount is taken into account. This share (=320) already appears on NinMount’s balance sheet - that is the reason why it is not added to total assets. 2) Consolidation: First, you take out the the investment in Boswell from NinMount’s balance sheet in order to avoid double counting (-320). Second, you combine both companies into one balance sheet, i.e. add the total asset value of Boswell to NinMount’s (+1,070). Third step is the most difficult to figure out. You calculate the goodwill as difference between purchase price of Boswell (2*320) and the value of it’s net assets (1070-490=580). This is then removed from Boswell’s total assets, as we do no want to include goodwill in consolidation since it bears no tangible value (-60).
mihau is very close to being right, but has said some wrong stuff. First, there was no goodwill in this question; if you don’t believe me, read the solution for number 26. alternatively keep reading this because my explanation is below. A 50% stake of Boswell was purchased for $320. We look on Boswell’s BS, and see net assets on their books of $580. 50% of that book value is only $290. The temptation is to assume that book value = fair value. Going forward with that incorrect assumption, one would go on to calculate the following: partial goodwill = 320 - 290 = 30 or full goodwill = 640 - 580 = 60 This is incorrect. The licenses have a fair value of $60, but they are not on Boswell’s balance sheet. The question tells us that the difference between the purchase price and the fair value of the 50% stake (per the balance sheet) is attributable to those licenses (whose value will be added to the consolidated balance sheet). 320 - 290 = 30 = 50% of the licenses’ value, therefore the full value of the licenses is $60. So now to solve for Asset turnover (which = Rev/A) For equity method, the calculation is straight forward and no adjustments are needed; you just take it straight from Ninmount’s side of the balance sheet: Rev/A = 950/2140 = .4439 For consolidation, you would add the two balance sheets together, but since Boswell’s balance sheet doesn’t include anything for the fair value of $60 for the licences, you have to add that as well. Also, you need to remove the line item for investment in Boswell since you are consolidating with them. The tradeoff is that you would show the minority interest in the newly merged Ninmount/Boswell corporation. A = 2140-390+580+60 = 2950 Rev = 950 + 510 = 1460 Rev/A = 1460/2950 = .4949
I want to point out also that this statement here is very very wrong: “This [goodwill] is then removed from Boswell’s total assets, as we do no want to include goodwill in consolidation since it bears no tangible value (-60)”’ If there is goodwill, you will absolutely include it on your consolidated balance sheet after a purchase if you paid for it. I have no idea what this guy means by “no tangible value”, but it does have value. in fact, it has a measureable value; two of them even: Partial Goodwill = Purchase Price – Fair Value of acquired Net Assets FULL Goodwill = Fair Value of whole subsidiary – Fair value whole subsidiary’s net assets If you follow GAAP, you will use the full goodwill value on your balance sheet. if you follow IFRS, you will put the partial goodwill value on your balance sheet.
Thanks msf. The #s in consolidated assets are off b/c dont equal 2,950. But i can seee in solution the correct #s.