Looked through the archives, couldn’t find an answer to this. Schweser states that if you have to consoldidate an SPE that the result is: - Higher Assets - Higher Sales - Higher Liabilities - Higher Equity - SAME NI Yet, in CFAI Book 2, Reading 21, p. 51 there is an example of a reconciliation from Capital One and it’s pre and post consolidation balance sheets are shown. These CLEARLY show an increase in Net Increase Income. Any consensus on how to account for a consolidation of SPE?
That is an increase in Net Interest Income. because of securitization - not in Net Income.
cpk: Wouldn’t an increase in net interest income contribute to net income and thus lead to a higher NI? Eh… too much thinking into this minor issue. I’m just gonna add it to my list of little things I don’t understand but memorize. Thanks for the help.
there is an immediate adjustment for noninterest income downwards (next line) - so yeah, do not bother too much and think NI remains the same in Consolidation. we are not reinventing the BS/IS now due to consolidation.
CP, one quick follow-up, and I’ll put this topic on ice – don’t you normally have higher depreciation when assets go up, which would decrease net income? Or does this not apply to SPEs? i.e. Sales increase Assets increase ^^ Depreciation expenses increase >>> Net income should decrease, no?
Equity doesnt change. This has confused me… In the example in Schweser regarding consolidation of a controlling investment (p 124 book 2) the Equity of the aquiring company remains unchanged. This makes sense as the amount of Equity in the target (which would increase the acquirer’s Equity) is exactly offset by the reduction in cash needed to pay for the target company. What happens if the acquirer pays less than the Equity value of the target? For example, assume a 100% consolidation Target Assets: 100 Target Liabilities: 50 Target Equity: 50 Acquirers Assets: 200 Acquirers Liabilities 100 Acquirers Equity 100 Post Takeover Merged Assets 100 + 200 - 30 (cash paid for target) = 270 Merged Liabilities 50 + 100 = 150 Merged Equity = 280 - 150 = 120 (an increase of 20 from before) In relation to VIEs, when a company sets up a VIE it holds on to a small Equity portion (one of the conditions is that they have voting power etc, share in the gains and losses). Where is this small Equity portion booked on the primary benificiaries balance sheet? Would it be in the investment account? The reason I ask is that when the VIE is consolidated the Equity of the Primary beneficiary also does not change, therefore it must already be on the Primary Benificiares BS. Thanks!
consolidation - you have the minority interest piece to be accounted for. If it is a 100% takeover - Minority interest would not be there - but Goodwill (badwill - a made up term here - to indicate negative goodwill) would be present. If you are comparing an Equity method against a Consolidation method or a Prop. Consolidation - NI, Equity and ROE remain the same.
Thanks CP I still dont understnad though. If you pay over the odds for some assets you include it as goodwill (intangible asset) on your BS and increase your equity. But if you pay less for a company than the value of its Equity sureley you should be able to recognise this somehow? Mabe when you bought the assets they would come on your BS at cost then you can adjust them up to market value? Any idea on how the Equity portion of the SPE is accounted for if you hold on to it?