Hi. …which intercorporate investment method would be used for the following scenarios: 1) An investor has a 55% interest in an investee but DOES NOT have control over it, or control is temporary. Is the equity or available-for-sale method used? I believe it’s the latter but want to confirm. 2) An investor has a 25% interest in an investee and has significant CONTROL and INFLUENCE over it, is the equity or consolidation method used? Control implies influence, but since control is used as a criteria for the Consolidation method, I’m not sure what method would be used. THANKS ALL!
- Available for sale is a cost method for <20%. Normally you would use consolidation but since you don’t have any significant control you use the equity method. 2. I would use consolidation even though it seems like a stretch since they only own 25% of the equity.
I am with Niblita. Control is the “controlling” factor.
for the second scenario i wouldnt go with consolidation becuase there is only 25% ownership.
Equity Equity Can we have the detailed solns now?
For 1 - You can’t use equity method if you are in i.e. litigation or standstill agreement - I disagree with everyone on this one but I might be missing something. For 2 - @ 25% Control = consolidation and infuence = Equity. Since this is control you consolidate.
Equity Consolidation As others have said “control” is the ultimate determinant; percentages are only a guideline.
OK, I am confused. Page 24 in CFAI text. It says about FASB 35 that “APB 18 prohibits the use of the equity method, despite 20% (or greater) ownership, if any of the following conditions is present” and then it goes on to name them. It says “greater” rather than stating 20 - 50. I looked at the consolidation and I cant find where it says that if there is more than 50 percent ownership but no control that the investor should use equity. Can someone please point me in the right direction?
first one is consolidation - control or otherwise, why should you be able to own that much of a company but report its results in the most favorable way? Equity
^^^That’s probably true, but I was just going on what the OP stated as either available for sale or equity.
there are companies out there that dont have a majority stake but control the company due to supermajority voting rights… Dow Jones company was one that came to mind…
For 1 - page 31 of CFA text is pretty clear that you cant use consolidation in the aforementioned situations. I do not see an errata for this either. As for it being considered equity - I disagree with everyone on this. I think it would be at cost/mv. Can someone please help? Where does the text say this?
the ownership percentage used to be the ‘law’ a few year ago now it’s all based on control i’d say equity for first and consolidation for second it doesn’t matter you only have 25% of it if you have control then it basically means it’s attributable to you
Let’s lose the theory, and determine what the June 7 answer would be. And I think it have to do with control
dmoxson Wrote: ------------------------------------------------------- > For 1 - You can’t use equity method if you are in > i.e. litigation or standstill agreement - I > disagree with everyone on this one but I might be > missing something. > > For 2 - @ 25% Control = consolidation and infuence > = Equity. Since this is control you consolidate. in your case for 1 not only you don’t exhibit control but influence is out of the disscusion as well - then you use cost of fmv
W.R.T. Q1, an answer explanation from schweser (Question ID#: 8868, part 6) says: “Consolidation is not appropriate when control is temporary or the parent does not control the subsidiary, even if it owns more than 50% of the subsidiary’s stock. Bankruptcy is an instance when control is relinquished. Prudhomme’s investment is therefore carried at fair value on the balance sheet.” If the investment is carried at fair value, this implies that the market method (or availble-for-sale) method is used given that fair value is not stated on the B/S under the equity method. W.R.T. Q2, I think it’s consolidation, but I’m searching for examples that would support my position. Thanks.
ACTUALLY, i think the first one is equity regardless of the schweser example i cited. schweser is not always right and can be inconsistent (not frequently tho).
Equity, Equity The first one is equity because CFAI clearly states that in cases of temporary control or situations in which the holding company does not have full majority control (such as companies where family owners may hold as little as 10% of the stock but majority voting rights as a result of legal structure) consolidation is not used. The second one is equity because you specificiatlly mentioned significant control, which meshes perfectly with the CFAI interpretation of 20-50% AND significant control.
black swan - i think the cfa uses the word influence for equity and control for consolidation. please reference an example or page in the cfai text where you see this. please look at my quotes from page 24 and 31 above.