It’s weird how just before the exam you start guessing your self on things you thought you knew!
Why is ROE the same for equity and Consolidation?
I understand the Net income is the same but wouldnt equity be higher under consolidation because you add minority interest?
ROE is higher for Equity method and lower for Consolidation for the reasons you said.
NI for both are same but equity for consolidation is higher and therefore ROE is lower.
AH my notes suggest that ROE is calculated excluding MI.
That’s weird though. So for the exam ROE is the same under both but ROA and NPM is higher for equity (because of the lower assets and lower sales)
Generally you calculate ROE without including minority interest in equity.
(It used to be that minority interest was put in a section between liabilities and equity, known as the mezzanine. At some point they got rid of the mezzanine and stuffed minority interest into equity.)
Thanks for the clarification Bill
You’re quite welcome, Rex!
Best of luck on Saturday. May the CFA gods give you no item sets on stuff you haven’t mastered.
I will be praying to the Sun God Ra and Lord of the Underworld Hades.
Thank you for all your help over the months. Next year I will be most definitely signing up membership to your site.
This has confused me now too:
So both methods have same NI.
And both have same Equity, after removing MI in Acq.
Is this correct?
Sorry, just to clarfiy because it also seems like I’m losing my marbles a bit.
When you say “Consolidation” you are refferring to the use of the Acquisition Method - correct?
Because from my understanding, under “Proportionate Consolidation” (only used in rare cases for JV’s) there is no need for minority interest so equity under the PC Method would by the same as under the Equity Method and thus ROE would be the same.
Yes: when we’re writing consolidation, we mean full consolidation: acquisition method.
You’re correct: proportionate consolidation doesn’t have a Minority Interest account (on the balance sheet or on the income statement).