If Company A with $1,000 of equity acquires a 70% stake in Company B which has $500 in shareholder equity. Assume book value = faire value and no goodwill (but I dont think it matters for this).
If we consolidate what is the consolidated entity’s shareholder equity?
Is it $1000 + $350 (70% * $500) = $1350 ?
Or is it $1000 + $150 (non controlling interest of 30%) = $1150 ?
Trying to be sure about what happens to the target’s equity.
On a balance sheet you would see Equity of 1,500 then a minority interest of (150) so when you add them up you’d have a total equity of 1,350.
Ok so the non controlling is negative in the equity section of the BS but you do add both company’s equity balance. Thanks
Ok so the non controlling is negative in the equity section of the BS but you do add both company’s equity balance. Thanks
Then why is it that for the control/acquisition method, they say that equity is more than proportionate consol/equity method by the amount of the goodwill…?
too tired to give a proper answer here, but this info is wrong. don’t combine equity. only add minority interest.
also, always double check anything anyone tells you on AF. lots of misinformation.
Correct Asnwer:
Use Acquisition Method. Parent uses Equity Method to create their stand alone BS. When creating the consolidated BS, E= Parent E + NCI
Target Equity is eliminated consolidation.
Minority interest is NOT negative. It has to be positive for the balance sheet to balance…
This is incorrect as well.
And yes, if there was goodwill, it would matter!!
Think about this way, if you remove cash from your cash account to purchase a company in excess of it’s fair value, but you can only report the new company’s assets at fair value, where does the missing cash go on the balance sheet? Goodwill makes the balance sheet balance 
Disagree.
When you consolidate you report all assets, all liabilities of the target. The portion of those NET ASSETS that do not belong to you show up as Minority Interest on the parent’s balance sheet… Minority interest is a positive part of total Equity.
This statement is correct, consolidate equity is 1150 in the example above.
jmachine is correct. definitely DO NOT add 350 to SE!
lemiman, thank you for confirming. thought I was going crazy for a second.
Would it not depend if you issued stock to go forward with the acquisition or if you simply paid in cash? If you have to issue stock to buy them, then it means your shareholder’s equity rises by the purchase price and then you add MI on top… ARe we always to assume that they pay cash?
what?
anyways, go to p.79 of schweser. don’t make it harder than it is.
Wow, a lot of confusion 2 days before exam. Do we have a consensus? I cannot find a concrete example in the readings.
Oh my gosh I’m so sorry I was thinking about the income statement. I really should’ve been more thoughtful. You subtract out minority interest earnings on the income statement but the minority interest account on the b/s is the portion of the company’s equity you do not own.
I was going to add that but did not want to complicate things. Assuming purchase includes issuing shares:
Consolidated Equity = Parent E + Minority Interest +New Shares Issued
For me everything is easy and understandable what you just talked about in this thread, but there is only thing I cannot get completely. If we are asked on the question which method, acquisition or equity, results in higher equity, then what would be correct answer, according to CFAI? You can answer that equity will be the same, but also that it will be bigger under acquisition method depending on wether or not you substract minority interest from equity under acquisition method. My question is what would be the right answer in the exam? What they call equity? Including or not including minority interest?