Under the various consolidation methods, net income and ROE are the same. This implies that equity also has to be the same. The following are two questions from the CFA books: Reading 21, EOC Question 3: At 31 December, 2010, Cinnamon’s shareholders’ equity on its balance sheet would most likely be: A. highest if Cinnamon is deemed to have control of Cambridge. B. Independent of the accounting method used for the investment in Cambridge C. highest if Cinnamon is deemed to have significant influence over Cambridge. My Answer: B… Actual Answer:A AND Reading 21, EOC Question 29: Based on Byron’s forecast, NinMount’s 2009 return on beginning equity most likely would be the same under: A. either of the consolidations, but different under the quity method. B. the quity method, consolidation with full goodwill, and consolidation with partial goodwill. C. none of the equity method, consolidation with full or partial goodwill. My Answer: B… Actual Answer: A Can someone explain to me why the equity value is different if ROE and net income are always supposed to be the same under any method?
I am not going to read thru the books to find the question, but I will go ahead and assume based on your comment that your confusion is because Although Net Income is the same under all methods, EQUITY IS NOT. Under consolidation method equity also includes non-controlling interest, which makes equity higher, and ROE lower, than the other two methods. This is an error in Schweser if thats where you are reading from.
Does this imply that ROE is not the same in all instances? Because my confusion lies with if net income is always the same, and ROE is supposedly always the same, then equity must also always be the same…
The assumption is an error from Schweser b/c it assumes that Noncontrolling interest (MI) is considered separate from equity. US GAAP and IFRS both consideres MI as part of equity. If you include goodwill into it, partial good will and full goodwill will also give you different MI and therefore different equity.
libor , the Schweser is wrong on this . They admit it in the errata section on their website: Here is the line from the errata confirming this: P. 30 Figure 9: ROE/Acquisition Method should be “Lower” not “Same”. i.e. since beginning of period equity is different between Equity Method and ( full or partial goodwill ) , having the same Net Income and Retained earnings doesn’t mean squat. The Equity is higher under acquisition NOT SAME , so ROE is lower not same . To answer your question , CFAI is right , Shareholders equity is higher under “consolidation using full or partial goodwill” than under Equity method . So ROE is highest under equity method
Shareholders equity is higher under full goodwill method than under partial goodwill.
Thanks guys.
I just saw the stupid question #29 it bothers me. I think ROE is NOT the same under full v. partial goodwill. With full goodwill, your equity will be higher. The CFAI answer says ROE will most likely be the same under either full or partial goodwill.
this is news to me too… whoa! shcweser screwed up