Saw on older thread that said equity was highest under full consolidation because FSAS 160 requires non-controlling interests to be booked as an equity component. Schweser has said ROE, equity, and NI are the same whether we use equity method, partial consolidation (IFRS) or full consolidation. So which is correct??? I understand that using" full goodwill or partial goodwill method" will effect my assets and equity (and ratios) when I fully consolidate. BUT, i was under the impression that ROE, NI, and equity were the same no matter which way I account for the entity. Schweser: “The effects of the equity method, acquisition method, and the proportionate consolidation method on leverage and profitability: * All three methods report the same net income. * All three methods report the same equity. * Assets and liabilities are highest under the acquisition method and lowest under the equity method; proportionate consolidation is in-between. * Sales are highest under the acquisition method and lowest under the equity method; proportionate consolidation is in-between.” CFAI books (p. 43-46) are saying GAAP and IFRS converged and if the parent consolidates financial statements (full consolidation AKA acquisition method) it has to report minority interest as an equity component and not a liability. My thought is that it theoretically shouldnt matter if i book it as a liability or equity. It should all shake out so equity and NI are the same under each method right?? I guess I’m just wondering if Schweser is dead wrong saying equity and NI are the same under all 3 methods? Worried I’m studying wrong material. Thanks.
Net income is the same under all 3 methods. However, the level of transparency varies due to the reporting of income and expense items. Equity is highest under the full consolidation because of minority interest. Following that logic, ROE would be lowest under full consolidation.
Jun2009, thanks for pointing it out. I read from Schweser too. Did not notice before, but they are incorrect in saying Same Equity under all 3 methods. Equity should be same for Equity Method and Partial Consolidation methods, but should be higher (given that net assets from the subsidiary is a positive figure) under Full Consolidation Method. Totally agree with budulog’s inference. Thanks.
Thanks guys… Schweser is a bunch of bums. Here I am studying wrong info. Think I’ll follow advice of others and rely on CFAI from here on out.