Investment in associates

CFA Level II
#1

Hi guys,

one CFA EOC answer states:

Investment in associates doesn’t affect EBIT or interest expense.

I do understand that it doesn’t affect interest expense but how doesn’t it affect EBIT?

Is the gain/loss from the investment listed below the EBIT line item?

Thanks for your help!

#2

Yes. Earnings from investment in associates is a non-operating income and is not part of EBIT.

#3

Great! Thank you skwak!

#4

Depending on the reporting method of the subsidaries (equity, consilidation, partial consolidation), you may have different type of reporting income from subsidaries. Under the equity method the income is reported net of tax, under consolidation - you aggregate Sales, COGS, … until EBIT.

#5

In case of Equity Method, Net Income from Subsidary in proportion (after tax) as a single line item is picked and reported after EBIT and hence EBIT is not impacted.

In case of Consolidation, line-wise-line Revenues and Expenses are Consolidated and Minority Interest is adjusted []… Revenues and Expenses line-by-line adjustment may impact EBIT but not the miniority Interest line.

In case of Proportionate Consolidation, line-wise-line Proportional Revenues and Expenses are Consolidated and Minority Interest is adjusted [].

Hope it clarifies.