Could someone please explain why equity is higher under the consolidation (aka. acquisition) method? Please try to give a simple example. Say parent has: A = 1,000 L = 700 E = 300 Subsidiary: A = 500 L = 350 E = 150 What happens when you consolidate the balance sheets? Assume parents buys 60% of subsidiary. Help…
Assuming they bought it at book value: A = 1000 + 500 - (150*.6) = 1410 L = 700 + 350 = 1050 E = 300 + (150*.4) = 360
just to confirm, the equity is high because of the “minority interests”, correct? stockholder equity (common stock) and retained earnings will be the same in all three methods (equity, aquisition, prop. consolidation).
austinCFA Wrote: ------------------------------------------------------- > just to confirm, the equity is high because of the > “minority interests”, correct? > stockholder equity (common stock) and retained > earnings will be the same in all three methods > (equity, aquisition, prop. consolidation). correct.
Equity method will lead to the most favorable ratios for the most part - so when in doubt, answer equity method 
shouldn’t Assets = 1000+ .6(500)=1300 Lia= 700+350*.6=910 Equity = 300+.6*150=390
epoh Wrote: ------------------------------------------------------- > shouldn’t > > Assets = 1000+ .6(500)=1300 > Lia= 700+350*.6=910 > Equity = 300+.6*150=390 no. its full consolidation so assets = 1000 + 500 = 1500 lia = 700 + 350 = 1050 equity is old equity + (MI% * MI) + equity issued to buy company if company was purchased with stock
Yep, equity is higher under the acquisition method due to MI. If you’re studying from Schweser, they say that it isn’t part of equity, although that is corrected on the errata on their website. The CFAi considers it is part of equity, so it will be higher under the acquisition method compared to the equity method. As a side note, proportionate consolidation method will be same as equity method, because there is no MI. Schweser are awful. The number of errors in their curriculum is shocking. And that’s a pretty big screw up.
ryanwtyler Wrote: ------------------------------------------------------- > epoh Wrote: > -------------------------------------------------- > ----- > > shouldn’t > > > > Assets = 1000+ .6(500)=1300 > > Lia= 700+350*.6=910 > > Equity = 300+.6*150=390 > > > no. > > its full consolidation so > > assets = 1000 + 500 = 1500 > lia = 700 + 350 = 1050 > equity is old equity + (MI% * MI) + equity issued > to buy company if company was purchased with stock But that doesn’t tie up with what bpdulog said in the second post. I can at least follow what you’ve done, simply added the investor’s assets/liabilities to the investee’s assets/liabilities and then for equity it’s the old equity + the MI. Can you please show the calculation for getting the actual equity amount?
look. once for all time. equity must be different depending on if full or partial goodwill is used. say net assets of susidiary is 160K purchase price is 180k for 90% of sub if full goodwill: you get an implied valuation of 180/.90 = 200K full goodwill = 200k - 160 of sub’s net assets = 200K, including 40K of full goodwill, yes?! noncontroling interest = 10% x 200K = 20K partial goodwill: 180K - 90% of sub’s net assets of 160 = 180-160x.9 = 180-144 = 36 goodwill. noncontrolling = 10% of 160 so 16K what goes on the consolidated b/s? 200K in net assets for full goodwill, of which 20K is noncontrolling 160k in net assets for partial goodwill, of which 16K is noncontrolling equity MUST be higher for the consolidated under the full goodwill method. in terms of equity versus PROPORTIONATE consolidation: sure, equity is the same im not sure how goodwill is handled in prop consolidation, would the same rules for goodwill apply? does full goodwill apply? if so, i think you can have cases where under prop consolidation u’d end up with higher equity, too. please correct me if im wrong.
CFAtime Wrote: ------------------------------------------------------- > ryanwtyler Wrote: > -------------------------------------------------- > ----- > > epoh Wrote: > > > -------------------------------------------------- > > > ----- > > > shouldn’t > > > > > > Assets = 1000+ .6(500)=1300 > > > Lia= 700+350*.6=910 > > > Equity = 300+.6*150=390 > > > > > > no. > > > > its full consolidation so > > > > assets = 1000 + 500 = 1500 > > lia = 700 + 350 = 1050 > > equity is old equity + (MI% * MI) + equity > issued > > to buy company if company was purchased with > stock > > > But that doesn’t tie up with what bpdulog said in > the second post. > > I can at least follow what you’ve done, simply > added the investor’s assets/liabilities to the > investee’s assets/liabilities and then for equity > it’s the old equity + the MI. > > Can you please show the calculation for getting > the actual equity amount? i didn’t get actual equity amount because it depends on 3 things that weren’t in the q. 1. full gw or partial gw 2. book value vs. fv of investee 3. whether equity or cash was used to purchase investment
This is just about minority interest. No need for any calculation.
ryanwtyler Wrote: ------------------------------------------------------- > CFAtime Wrote: > -------------------------------------------------- > ----- > > ryanwtyler Wrote: > > > -------------------------------------------------- > > > ----- > > > epoh Wrote: > > > > > > -------------------------------------------------- > > > > > > ----- > > > > shouldn’t > > > > > > > > Assets = 1000+ .6(500)=1300 > > > > Lia= 700+350*.6=910 > > > > Equity = 300+.6*150=390 > > > > > > > > > no. > > > > > > its full consolidation so > > > > > > assets = 1000 + 500 = 1500 > > > lia = 700 + 350 = 1050 > > > equity is old equity + (MI% * MI) + equity > > issued > > > to buy company if company was purchased with > > stock > > > > > > But that doesn’t tie up with what bpdulog said > in > > the second post. > > > > I can at least follow what you’ve done, simply > > added the investor’s assets/liabilities to the > > investee’s assets/liabilities and then for > equity > > it’s the old equity + the MI. > > > > Can you please show the calculation for getting > > the actual equity amount? > > > i didn’t get actual equity amount because it > depends on 3 things that weren’t in the q. > 1. full gw or partial gw > 2. book value vs. fv of investee > 3. whether equity or cash was used to purchase > investment Let’s just say full goodwill, bv = fv and cash.
if bv = fv then there is no gw. MI = .4 * 150, so new equity = old equity + MI
zoya Wrote: ------------------------------------------------------- > look. once for all time. equity must be different > depending on if full or partial goodwill is used. > im not sure how goodwill is handled in prop > consolidation, would the same rules for goodwill > apply? does full goodwill apply? if so, i think > you can have cases where under prop consolidation > u’d end up with higher equity, too. > > please correct me if im wrong Under prop consolidation, there will be no minority interest. You will be getting your proportional share of the assets and liabilities. Income from sub and equity from sub will be eliminated.
and, in the above example, if you had an investment in the sub prior to consolidating you would have to subtract the old invesment from assets.
Due to minority interest, will ROE measure differ between full and partial goodwill? I have noticed on page 50 of FRA CFAI text there is an example where ‘Shareholder’s equity’ and ‘Equity’ are separated by Minority Interest. Which figure would be used to calculate ROE?
Nevermind I see on page 47. Sorry 