On 31 December 2015, Normandy PLC, a UK-based company, paid ₤400 million to acquire a 50% stake in Asquire Co. The purchase price was in excess of the fair value of Asquire’s net assets, attributable to previously unrecorded patents with an economic life of four years. The fair value of Asquire’s assets and liabilities other than patents was equal to their book values. Normandy and Asquire both comply with IFRS. Normandy believes that both companies’ 2016 financial results excluding merger adjustments will be similar to 2015. The following table gives the selected data of both companies at 31 December 2015 (in ₤ millions).
3 possible methods used are 1. Equity method. 2. Consolidation with partial goodwill. 3. Consolidation with full goodwill
Based on Normandy’s forecast, return on beginning equity in 2016, for Normandy will be most likely :
A. different under equity method, but same under either of the consolidation.
B. same under all the three methods.
C. different under all the three methods.
Answer is: A is correct. Net income is the same under all the three methods. Beginning equity under the equity method is ₤1,735 million. Under either of the consolidations beginning equity includes ₤400 million of non-controlling interest = ₤1,735 + ₤400 = ₤2,135. Therefore, return on beginning equity is highest under equity method.
Why equity is the same under both consolidation method? Aren’t we suppose to have higher equity under full goodwill method due to higher non-controlling interest?