Question 83 in Schweser Mock Exam #2 (book 1)
The question asks how chaning the accounting method of a SPE from equity method to consolidation method is going to affect the Return on Equity ratio.
I thought Return on Equity stays the same under equity method and prop consolidation?!
The answers says the ratio will decrease as equity figure will increase.
Error or my flawed thinking?
Net Income equal in all 3 methods
equity is higher by Minority share holding for consolidation method
==> NI/ Equity will decrease ==> ROE will decrease under consolidation
and ur right RoE is same under equity method and prop consolidation
Sorry, can someone please explain what the difference is between “consolidation” and “proportionate consolidation”?
I had the same question as asked by the OP. I thought Schweser was wrong but Brijwanth’s answer implies otherwise. The question is specific in saying “consolidation” but not saying “proportionate consolidation”.
EDIT: I think I figured it out. I’m used to calling “consolidation” the “acquisition method”. I guess they are the same thing?
Normally when you compute ROE you exclude minority interest from equity, so it’s the same as equity method.