On SS7’s last chapter (Integration of Financial Statements Techniques), P.187-188 on Schweser, there are two tables with Dupont analysis for the company mentioned in the example. One with ROE calculated including Equity income, and one excluding the impact from Investment in associates (removing from IS and BS).
My question is: where do we usually show equity income in the IS? Is it right after EBIT? That’s my understanding. However, in that same example, there is a footnote saying that they do not include equity income on EBIT or EBT, so implicitly they’re including it along with taxes, which in my view doesn’t make too much sense. Could someone clarify this point? Thanks!
Income from Investments accounted for using the Equity Method is classified as revenue, at least under US GAAP. I am not sure how that fits with your question, but it would appear as revenue. For example, at my current employer, it is buried in a line called ’ Other Revenue’ since it is a non-material amount.
Consolidating vs. Equity Method will almost always result in higher Debt/Equity ratio. That may be why DuPont calculates with and without. I haven’t gotten to that part in my studies, yet.
Hm, i don`t think that according to CFAI we are supposed to classify the equity income line as revenue on the parent’s income statement.
So it is often booked as “Other Revenue” or something along those lines?
Then, obviously, it must usually impact EBIT and EBT, I assume?
I guess their example was just for the sake of simplification.
If you see an “Investment Income” or “Net Investment Income” line on the P&L, you can assume it is in there. If not, it is pobably in a miscellaneous bucket like “Other Income”.
Okay, I just got the Schweser books and can see the chart you reference (p. 187). In addition to asking you to remove Equity Income from the Income Statement they are also asking you to remove the Equity Investment from the Balance Sheet. For example, 2016 has $896M in Equity Income and $6,255 in Equity Investment Investments. Remove them both from the analysis.
The idea here is that they want the analysis to cover the operations of the business that management can control. Equity Investments, by definition, you don’t control, or you would consolidate them. So in this example they ask that you strip it out.
It raises the quesiton of if you should do the same for investments helkd as Trading/AFS/HTM because the same principle seems to apply. On the exam, I’ll look for clues in the vignette that indicate the Investments are material, and if so, remove them.