Hi All, Can somebody please explain how does income statement differ in above two cases? If you can explain items like Net Income and Minority Interest that will suffice. Controlling Interst by owning 50% and significant interest by owning the same percentage. And please add other scenarios which you think might be worth understanding. Thanks, Gags
significant influence is going to likely be at least 20% ownership but not necessarily. they can still exert significant influence without owning 20%. if they do have significant influence, the method used should be the equity method. under controlling interest, it would be consolidation method. with consolidation method, if you own 50% of a company, you list 100% of its assets and liabilities (ignore stockholders equity). However, since you dont own 100% of the company, you list minority interest for the portion you dont own (contra account?) in the equity section. net income and stockholders equity should end up being the same in both cases no? i dont have my books with me so please correct me if i am wrong people.
Most of this I knew. Still thanks for revising the concepts. I am looking for Income statement (not the Balance Sheet) specifically. I am not sure on NI and SE. However, if they end up being the same does it also mean that specific line items in the income statements are exactly the same in both the cases? Minority Interest is under Net Income. (If I am not wrong). If SE and NI end being the same in both the cases then is there Minority Interest or some equivalent of Minority Interest (may be Equity - Net) in both the cases (significant influence and controlling interest). I am thoroughly confused. Some expert please help. Regards, Gags
equity method - which is significant influence - there is no minority interest. minority interest in the income statement only happens for the Consolidation method (controlling interest scenario) and = % Not owned * Net Income of subsidiary (and this is subtracted).
CP, Thanks. What happens to Net Income then? Do all the items remain same while calculating NI? And is there any difference here between IFRS and US GAAP? Regards, Gags
CP, Last practice set in Reading 21 has competely confused me and that’s why I have these doubts. You can check it in CFA material and may be then clarify my doubts better as to how calculation of Net Income will differ in two cases. Gags
Net income is the same regardless of method used. ROE and equity is also the same regardless. For available for sale securities: IRFS - unrealized gains/losses on FX appear in the income statement. GAAP - unrealized gains/losses in general appear in other comprehensive income in equity on B/S IRFS - unrealized gains/losses in general appear directly in equity For joint venture: IRFS - proportionate consolidation preferred, equity allowed GAAP - equity (apart from rare cases in unincorporated companies in the construction industry where proportionate consolidation is allowed). Can’t think of any other diffs …
> > Minority Interest is under Net Income. (If I am > not wrong). > If SE and NI end being the same in both the cases > then is there Minority Interest or some equivalent > of Minority Interest (may be Equity - Net) in both > the cases (significant influence and controlling > interest). > There are adjustments to make under both methods on the income statement. For Equity method, the Net Income of the parent company will be the same other than an additional line item in their income statement called “Equity in income of Investee” or, like in the CFAI mock exam, they call this “Equity Income” For Consolidation Method, there is no “Equity in income of…” because you have consolidated the two companies revenues, expenses, and other assets and liabs. However, you cannot completely consolidate the both since the parent will not own 100% of the investee. Therefore, you have a “Minority Interest” account that is a contra account (deducted from) the Income Statement to arrive at net income. So for Equity Method: remember the Income Statment holds the “Equity in income of…” line (which adds to income) for Consolidation Method: the Income Statement reflects a “Minority Interest” line (which subtracts from the income stmnt) On the B/S, Equity is a one line item on current asset. Initially recorded at cost and increased by the Pro Rata share of the earnings. Dividends are NOT recognized in the income statment and instead act as a return of principal reducing your noncurrent investment item on the B/S.
Minority interest can be tricky on the BS. Easiest way I have found is to remember that there will be a Minority Interest portion in both the BS and the Income statement. To calculate what the minority interest should be on the consolidated BS of the parent, take the [(retained earning + common stock at time 0) + Net Income for the year 1- Dividends for the year 1] x % not owned. If they ask for individual minority interests on the IS, you will take their (net income X % not owned)