I am reviewing FSA before I go to the John Harris course this weekend and don’t understand the answer to question 30 on reading 21. The answer in the back of the book is wrong as the errata says “Solution 30 did not consider Ninmount’s inclusion of its investment in Boswell included in its total assets (320) and the restatement of Boswell’s assets to fair value (60). Therefore, C is correct. Using the consolidation method, 1460 / (2140 - 320 + 1070 +60) = 1460 / 2950 = .495” My question is, where do you get the restatement of Boswell’s assets to fair value and why do you do this?
At the beginning of the question’s text, it says that NimMout paid 320 for 50% of Bosswell, with the excess being attributed to previously unrecorded licenses. Boswell’s total net assets=1,070-490=580, of which NimNout buys 50% for 320, so 50%*580=290, NimMout paid 30 more for its share of 50% of previously unrecorded licenses. That makes the fair value of previously unrecorded licenses 60. Both use IAS, both apply IFRS’s which requires that NimMout and Boswell be accounted for at fair value. From the text, it is not clear if NimMout is minority active (50%) or a controlling interest, since there is no indication as to the control or influence over Boswell, but it looks like the text applies the IFRS purchase method.
Boswell’s Net Assets = 1070-490=580 Ninmount purchased 50% stake for 320 Actual value of 50% stake = 580 * .5 = 290 So excess paid = 320 - 290 = 30 for a 50% stake. So full value of the net assets should have been 60$ more…
hey Bradleyz, I’m thinking about going to the John Harris class when he comes to my neck of the woods in March. would you mind posting your thoughts on the class when you’re done?
Thanks for the help map1 and CP. You can do a search to see what people have thought about the John Harris classes. That’s where I heard about it so I’m going to give it a try. I’ll also post my thoughts after I’m finished.
yeah i’ve heard nothing but glowing reviews, but would defintely appreciate your feedback.
I have another question on this, why 320 is subtracted from the total asset? Bradleyz Wrote: ------------------------------------------------------- > I am reviewing FSA before I go to the John Harris > course this weekend and don’t understand the > answer to question 30 on reading 21. > > The answer in the back of the book is wrong as the > errata says “Solution 30 did not consider > Ninmount’s inclusion of its investment in Boswell > included in its total assets (320) and the > restatement of Boswell’s assets to fair value > (60). Therefore, C is correct. Using the > consolidation method, 1460 / (2140 - 320 + 1070 > +60) = 1460 / 2950 = .495” > > My question is, where do you get the restatement > of Boswell’s assets to fair value and why do you > do this?
you are switching from the equity method (where the 320 made its way into the B/s) to the Full Consolidation method… so any prior equity method accounting has to be removed.
3x, gotcha I do not get the answer to question 29, it said return on beginning equity is the same under all three methods. which means NI and beginning equity is the same no matter what method used, right?
NI and Equity has to be the same ( and hence ROE is the same) across all methods. When you go from Equity to Prop Consolidation - you get more transparency in the figures. So even though Prop Consolidation is not allowed for JVs in US GAAP - using that to analyze the financials gives you a better handle on the Assets and the Liabilities on the Balance sheet - which is better for analysis.
let say using equity method NI=75M then using propotional consolidation, isn’t NI=75+5=80M using full consolidation NI=75+10=85M I am very confused here. cpk123 Wrote: ------------------------------------------------------- > NI and Equity has to be the same ( and hence ROE > is the same) across all methods. > > When you go from Equity to Prop Consolidation - > you get more transparency in the figures. So even > though Prop Consolidation is not allowed for JVs > in US GAAP - using that to analyze the financials > gives you a better handle on the Assets and the > Liabilities on the Balance sheet - which is better > for analysis.
with the same numbers in the initial balance sheets - you would end up with the same NI on each of the three (as will the equity figure be the same). remember that has to be the same irrespective of the method of accounting. In Prop Consolidation and Full Consolidation - you would have the minority interest compoonent. you cannot make up numbers like you have above. with the same balance sheets and income statements being combined - with any of the methods - you will end up with the SAME NI and the Same Equity figures. look at the schweser examples (as also in the text book).
cpk123 Wrote: ------------------------------------------------------- > you are switching from the equity method (where > the 320 made its way into the B/s) to the Full > Consolidation method… so any prior equity method > accounting has to be removed. CP, why the switch? There is no indication that the 50% owned by NimMout is controlling (yes, significant influence as evidenced by the 50% ownership, but not control).
question 30 is specifically asking to consider the impact of consolidation method and prop. consolidation method. either of those methods would require to back out the equity method figure showing up on Ninmount’s balance sheet.
I’m wondering if, for the exam, it would be safe® to assume that a 50% ownership, even without indication of control (like representation on the board, material transactions between the parties, technological dependency, interchange of management personnel, and/or participation in the policy making process) is indication of controlling interest, hence use of full consolidation.
Map1, If no other informtion is given in question than according both CFA and Schweser 1) if more than 50% then controlling interest, consolidated) 2) if 20 to 50% then signifcant influence, equity and 3) and if less than 20 minority passive. So 50%, to my undestanding, would be equity (unless q specifically asks to consider otherwise). Thadi