Only mention in the vignette:
“This past year, Samilski began using special purpose entities for various reasons … required under new accounting rules is classification as variable interest entities and consolidation on the balance sheet …”
Question: What are the likely effects on the required change in accounting for SPEs on Samilski’s Return on Assets and Return on Equity?
I said decrease ROA and no effect on ROE.
Given solution is “As a result of consolidating SPEs that were previously accounted for using the equity method, assets and equity (due to minority interest) will increase but net income won’t change. Therefore, return on assets as well as return on equity will decrease.”
So, first, the answer implies that if there were no equity interest then there would be no change to equity - is this case? I would think so … My second question is, if there is a minority interest in the SPE then wouldn’t the minority interest be entitled to some of the net income and, as a result, wouldn’t consolidation result in BOTH a change to NI and equity, leaving the effect on ROE unknown? Would you really back out the minority interest portion from NI, but not back out the minority interest from equity, when calculating ROE?
I vote this as a poor question but maybe I’m missing something?