CFAI L2 2011 Mock Afternoon Q37 Why consolidation method?

So the company is owned by 3 companies, which in my understanding should be a joint venture. Shall we use proportionate instead of consolidation method?

btw, what does consolidation method mean? It seems to be acquisition method according to the answer

Cupernico should use consolidation method because they are deemed to have control. This is acquisition method. The other 2 companies should use equity method since they have significant influence.

but why it’s not a joint venture?

oh i think i got it. joint venture requires all the companies have control?

no, in a joint venture you have JOINT CONTROL

consolidation = acquisition method.

since Cupercino has CONTROL, not JOINT CONTROL , you use Ac. Method.

the other are equity since they do not have joint control or control. anyway since it’s a US GAAP probleme even if they had JOINT control they would have been consolidated with Equity method

oh and if Cupercino had JOINT control it would have been equity

I see. thanks!!

I might be wrong, but I think JOINT CONTROL can only be for 2 companies. The word joint implies that 2 entities share control. The second you have a 3rd owner, you have a tie-breaker and thus no joint control…

Is that wrong thinking?

That is what I thought when I did the question (and got it right, lol)…

Joint control is usually a 50%/50% split between 2 companies. However, this control could be shared equally 1/3 between 3 investors, 1/4 between 4 investors etc

so joint venture can have <50% control? and we would still use porpotionate consolidation?

It’s all about control. The percentage doesn’t really matter. If you have 45% of a company’s stocks, but you have no say in anything (it was in one of the mock or schweser practice), then it will be a available for sale or held for trading. You can have Proportionate consolidation if the control is less than 50%, as long as the control is share by the companies.

The reason 50% > is consolidation is because if you have more than 50% you have absolute power over that company. It’s kinda like your subsidary, but you sold parts of it to others. It should count towards your balance sheet, since it’s kinda like an extension to your company.

Equity method is because you can affect cash flows (dividend policies), so the cash flow you gain from handing out or keeping the dividend in the company should go towards the value of your company.

Proportionate is you have a joint share of the control in a company, since no one owns the whole thing it wouldn’t be right to put it on anyones balance sheet, so that’s why you divi up into equal shares and place it on your balance sheet

on to the next test