Lost in intercorporate investments

CFA Level II
#1

I am lost in intercorporate investments.

Could somebody give me a brief of all the possibilities and how it is supposed to apply?

pool interest metthod… consolidation…when it is a join…

#2

So this is going to be a fun post for me:

firstly, if you control the entity it’s consolidated. If you influence it you use the equity method.

Net income is always the same between these two, but equity will be higher when consolidated due to the inclusion of minority interest in the equity portion of the balance sheet. This also means that assets will be higher when consolidated, but leverage is anyones best guess because it depends on the financial structure of the company being consolidated. This makes ROA (higher assets, same net income) and ROE (higher equity, same net income) lower for consolidated combinations, which is less favorable

With JV’s you must use the equity method whether IFRS or GAAP, pooling of interest is typically not used last time I checked (someone might need to confirm part 2 of this, but part 1 is correct). JVs are special entities, typically with 50/50 ownership or something similar.

There you go

#3

Easy as Company A + Company B = Company C C for consolidation

Without a doubt they will ask that 120 times.

#4

So if I have a JV with 50% , when I have to make my consolidated financial statement? or have I to use equity method?

I ask this because in 1 excercise of kaplan study season they made a consolidation :S with a JV

#5

SORRY I was not correct.

In JV we can use either equity method or acquisition method.

Please , I have a question… when we made the income statement under acquisition method , are all the revenues joined? i THINK yes but…

What happen to the expenses? are they joined ina pro rata?

#6

sorry formy insistence but…

when can I apply goodwill? IFRS- GAAP?

Acquisition-equity method?

#7

Is it control or influence? Please read the original postings

Revenue is increased in consolidation, not with the equity method. If you understand how each method functions you will find the answer to your question on what happens to expenses.

Gotta’ make 'em work, right? :wink:

#8

20%-50% share, or “less than 20% but with significant influence”, or joint venture = equity method

50%+, or “have control” (more than half of the seats on the board) use consolidation

full goodwill if under GAAP

full/partial goodwill if under IFRS

IFRS used to allow propotional consolidation but not anymore.

With consolidation, you pick up 100% of asset, revenue, expense, liability, etc (even if you own less than 100%).

However, NI is the same under ALL METHODs.

With full goodwill, you have higher asset/equity than partial goodwill because of higher NCI.

#9

Thanks all of you!