Why is Net Income equal under "Control" and "Significant Influence"

CFA Level II FRA
#1

I am refering to FRA - Intercorporate Investments, EOC 12. Why is the Net Income the same regardless of whether a 50% investment is considered as “Control” or “Significant Influence”. Net Income Parent = 75 Net Income Subsidiary = 68 I thought that: • under “Control”, the NI of the parent becomes: 75+68=143 • under “Significant Influence”, the NI of the parent becomes: 75+68*0.5=109 But apparently my reasoning is wrong. Can someone explain why? The curriculum doesn’t explain that properly and mainly focuses on Balance Sheet items.

#2

Simply in control you will have to subtract the portion of income you DO NOT control from the TOTAL income, while in significant influence you are already taking the invested %.

hope it helps

#3

I’m using Elan Guide and it’s not explicitly stated and have been unable to locate that statement in the curriculum, could you point me to the correct section? There is emphasis on the Non Controlling Interest on the balance sheet, but what happens to the income statement seems secondary. I sort of deduced it from doing exercises but maybe I’m missing some detail. Thanks in advance.

#4

On the income statement you will create a line item for non-controlling interest reflecting the allocation of profit or loss for the period to the minority share.

Basically the same concept as the balance sheet adjustment, but on the income statement and relfecting income. The CFAI text goes over this.

#5

Using the equity method, you show your proportional share of the subsidiary’s income in a single line.

Using consolidation, you show 100% of the subsidiary’s income on a host of lines, then on one line subtract the proportional interest that isn’t yours (minority interest); the net’s the same: what’s yours is 100% minus what’s not yours.

#6

I’ll take your words for granted for the exam, I can’t manage to locate that in the curriculum. Thanks again for dispelling my doubts.

#7

My pleasure.

#8

Don’t take anyone’s word for it. Restudy it yourself to confirm your understanding.

Pg. 78 of the FRA book (if you’re using a pdf viewer) or Pg. 160 (hard-copy) at the bottom of the page. Start reading from the 'Business Combinations with Less than 100 Percent Acquisition"