Minority interest in consolidated subsidiaries

answer is D. What is Minority interest in consolidated subsidaries and how is it debt? ------------ Which of the following is reported as debt on the balance sheet? A. Preferred stock. B. Operating leases. C. Investment in affiliates. D. Minority interest in consolidated subsidiaries.

chinni, accounting for intercorporate investments is LII material, you do not need to be concerned about this for the LI exam. However, if you’re still curious, find literature discussing the Cost, Equity, and Consolidation methods of accounting for investments in other companies (US GAAP). IAS GAAP also permits a method called Proportional Consolidation.

But this question is from the CFAI sample exam for Level 1. I guess we will just have to memorize it…

Really? I’d like to see the relevant LI LOS. So far as I’ve sen, no other LI candidates have posted questions related to intercorporate investments or minority interest specifically. This material is covered across three readings at LII.

Even D is a off balance activity. It is adjusted and brought back as debt for analysis. It is mentioned in the footnotes.

No, you must be thinking of B, operating leases. Minority interest is in-between the Liabilities and Shareholder’s Equity section of the consolidated balance sheet. See, for example, p.70 of GE’s FY06 balance sheet (link below), or you can get to the line item quickly by word-searching for “Minority interest in equity of consolidated affiliates (note 22)” http://www.sec.gov/Archives/edgar/data/40545/000004054507000017/ex13.htm

When a company has a minority interest in another affiliate, it is never seen on the main company’s balance sheet. THis is bcoz the primary company does not consolidate its balance sheet with the affiliate. This is a practice used by companies to “hide” their debt. When an analyst analyses, he needs to ascertain the % stake the primary has in the affiliate and add it to the balance sheet.

Again this is something I have read somewhere. Have not seen it for myself

smeet, we’re discussing two different things. I’m referring to the line-item known as “minority interest” (a.k.a. “noncrontrolling interest”) that appears when parent companies must use the Consolidation Method to account for their investment in the affiliate. This occurs when the parent has control over the affiliate, approximately >= 50% ownership. The Cost and Equity methods do not create such a line-item. But, like I said, I don’t think any of this is LI material. Are you possibly thinking of special purpose vehicles (a.k.a variable interest entities and qualifying VIEs)?