Is “Total Assets” the same under the proportionate consolidation vs. equity method? Why? Why Not? Thank you
olivier, total assets are higher under proportionate consolidation. There’s a good example contrasting the two methods on p.41-42 of this year’s CFAI curriculum, Volume II. Take a look and maybe we can help you with some more specific follow-up questions.
Yes, there is an example of a company “Petroleum” investing in another company “Supply” with a lower ROA. In this case, it makes sense that under proportionate consolidation ROA would be lower since ROA will be a weighted average of the ROA of both companies. Would it still be the same if “Supply” had a greater ROA than “Petroleum”? Also, the equity method takes the price we paid for the investment as the starting point. So, if we paid a gazilion for our equity investment in an empty shell (Asset base (book value) of investee virtually inexistant), wouldn’t the equity method have a greater “Total Assets” value?
Ok, my “gazilion” “empty shell” is a little extreme, but since we invest in a company we like aren’t we willing to pay more (for growth, PVGO) than its book value. If so, the equity method would have an higher starting point under the equity method.
Nah, the intangible assets will be part of “total assets” in the consolidation case, so total assets would still be higher under partial consolidation.