Summary for Intercorporate Investments

CFA Level II
#1

  1. Equity and Net Income is the same under Equity and Proportionate Consolidation. ROE is the same. ROA is higher, leverage is lower, profit margin is higher under equity vs proportionate consolidation.

  2. Net Income is the same under Equity and Acquisition Method. Shareholder’s equity is not the same however. Again. ROA is higher, leverage is lower, profit margin is higher and ROE is higher too under Equity method.

  3. Less than 20% is passive investments, 20-50% is equity method and more than 50% is acquisition method.

  4. For JV, US GAAP allows Equity method and IFRS allows Proportionate Consolidation Method.

  5. Pooling of interest (discontinued) - but you take book values of all assets and liabilities.

  6. Operating Income will be different under Equity and Proportionate C and also between Equity and Acquisition Method.

Please correct me if I am wrong and feel free to add more.

#2
#3

Joint ventures require equity method for both.

What the hell is Proportionate Consolidation?? Is this only for past statements and now not allowed anymore?

#4

Proportionate consolidation is still allowed under IFRS. This is where you take the pro-rata share of the subsidiary’s B/S, I/S and include it in the original company’s B/S, I/S.

#5

Guys - please add if I have missed anything. It will be a good summary for last minute revision.

#6

IFRS9 will remove prop cons method for JV’s - this is not live yet

#7

but what about the exam ?

#8

but what about the exam ?

#9

You have pretty much summarised the major points.

What I have added on my flash card

ROA/ROE/Profitability: Equity > Proportionate > Consolidation

#10

I think the JV issues is live and its only equity method for both GAAP and IFRS. the change took place in Jan 2013 and thats what the curriculum states. I had the same question earlier: http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91333522

#11

Why would the ROE be greater under Equity method as compared to the proportionate consolidation?

Both Net Income and Equity are the same so they should be equal.

#12

You missed investments in financial assets.

#13

My bad. Yes you are correct. I typed that last night when I was brain dead.

#14

For #3 you also have to look for info about significant influence and control, which is the key determining factor. I could see them saying they hold an 18% stake, but have significant influence.