Shareholders' Equity same under Equity & Proportionate Consolidation Method?

CFA Level II FRA
#1

Hello,

Apparently shareholders’ equity is the same under the Equity and the Proportionate consolidation method, but I can’t seem to understand this.

If a company has a 50% stake in another, under the prop consolidation method, it accounts for 50% of every line item under SE, however under the equity method, SE would just increase by 50% x (NI - Dividends).

But the investee’s SE can change due to other factors than NI or dividends, for example if there is additional paid in capital or if other comprehensive income changes. Under the prop method, half of it would appear on the investor’s BS under SE, but would it be taken into account under the equity method? The CFA book doesn’t say anything about that.

Thank you for your help.

#2

If you’re using stock to purchase the subsidiary, the equity will be the same under both methods. In equity method, the acquirer includes a one-line consolidation of the target. Dividends decrease the investment, think of it as return OF capital rather than return ON capital.

Proportionate consolidation - the parent company’s share of each asset and liability of the JV is included. SE will be the same under equity and PC because you are only recording your pro-rata share of assets, liabilities, revenues and expenses of the JV. According to my notes, equity is not included in this list. That makes sense because equity is the same under both methods.