could someone tell me if this is right: Income statement using equity method - consolidate earnings in proportion to the stake held in affiliate Balance sheet - include minority interest directly to equity and investment in affiliates?
Yeah that’s the way I thought of it, but can’t confirm this 100%
On the IS, you have to remove the minority interests’ share of NI net of excess depreciation due to market value adjustments.
under the equity method, no minority interest gets recorded. Think about it logically - if you only own like 20% of the company, YOU AS THE 20% OWNER are the minority interest. Minority interest is a concept for the acquisition method, when i consolidate a company (>50% ownership) for which I don’t own the entire thing. Under full consolidation, i record 100% of the assets and liabilities of the acquired company, and then reflect the fact that I don’t actually own 100% of the company via the minority interest account.
yeah, no MI. Beginning Book Value + (Your share of NI from investee - Excess Depreciation) - Your share of dividends from Investee ___________________________________________ =Ending Book Value
Could someone explain the excess depreciation here when dealing with equity method?
Excess Depreciation is based on you writing up their depreciable assets. They will report depreciation based on their carrying cost (which is cost probably) if you determine that their value is worth more on date of aquisition, you have to amortize that excess using the investee companies depreciation method. e.g. you pay $100k for 50% of company a. the Fair value of their Net Assets is 40k. Book Value of investee’s PPE is $5k and fair value is $10k. You have to write PPE up to 10k. if they were depreciating their 5k at 20% per year then you have to depreciate your $5k 20% per year (1k) so Beg Equity Inv. = 100k + your share of their NI: lets just say 5k - excess depreciation 1k - Dividends Paid to you : 1k ______________________________ = ending Equity Inv. 103k
50% of company (acquisition) you would put ALL their NI on your B/S and add MI in equity section, as well as add an MI section in I/S… need to look at this again. Understand NI will be the same but not sure on the proportions of your depreciation on your I/S to get to NI. Or is your example assuming no significant influence and so equity method being used, so the NI portion that is owed to you nets off the investees depreciation…?
excess depreciation only results when their is a difference between market value and carrying value of the assets of the investee. You must amortize the fair value over carrying value. For example, I pay $120 to acquire a 20% share in a company that has recorded net assets of $550. $550 * .2 = $110. So, i paid $10 over the book value of the assets. This can either be because of goodwill, or because the fair value of the identifiable assets of the investee exceed their carrying amounts. SO I assess and determine that the extra $10 is entirely attributable to the fact that the investee’s PP&E’s fair value is greater than carrying value. I must amortize(depreciate) this excess amount. If i determine the excess amount is not attributable to any tangible assets, i record the entire amount as goodwill, and do not depreciate/amortize it, but test it for impairment at least annually.
my example is assuming no control because i was answering a question regarding equity method. and its assuming no CONTROL, not Sig influence. control is the criteria for consolidation and smiley did a much better job than me at describing exccess depreciation
Great got it. For Acquisition method however the excess dep on the I/S ALL goes under the parent under depreciation or is part of the excess NETTED off the subs Minority Interest.