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S_mccoll

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Hi I am trying to work out how if equity remains the same for equity and proportionate consolidation - how can ROE be higher if both equity and net income do not change i.e both the denominator and the numerator don’t change?
thank you very much to who ever answers me.
 
I may answer my own question but when it says ROE is higher? Does this mean higher than preacquistion or higher than the other method ie higher than acquisition method?
thank you
 
ROA may be higher under proportionate consolidation, but ROE will be the same under both methods. You’re right that net income and equity are the same between methods.
You should be aware that new IFRS 11 ends the ability for companies to use proportionate consolidation for joint ventures and now is in line with US GAAP. But go with whatever the books say, the CFAI may not have updated.
 
hmmm I’m going to totally confuse things here as I thought under the prop consol method you increase equity thus decreasing ROE. Under prop consol aren’t your required to add a portion of the acquired companies equity to the acquirer’s equity? Equity would be lower under equity method as it on consists of acquirer’s equity???? Wouldn’t be surprised if I was wrong though..
 
Shareholders’ Equity is the same whether the investment is presented using the equity method, proportionate consolidation, or full consolidation.
 
if i may to add
for acquisition method which in this case is consolidation method
the acquisition method equity is higher by the amount of minority interest compared to equity method—->so ROE for equity method is higher due to lower equity and Net income stay the same, for Acquisition method ROE is lower
the case is the same for ROA—>by using equity method ROA is higher due to lower asset and Net income is stay the same
Hope this help
 
forumusernew wrote:What about minority interest? Should we not take this into account? Cheers
Click to expand...
You’re correct: in referring to Shareholders’ Equity I should have specified that I’d meant it to exclude minority interest. It used to be that that wasn’t included in Shareholders’ Equity, but was in an area between Liabilities and Shareholders’ Equity called the mezzanine. I prefer that presentation.
 
winston84 wrote:if i may to add
for acquisition method which in this case is consolidation method
the acquisition method equity is higher by the amount of minority interest compared to equity method—->so ROE for equity method is higher due to lower equity and Net income stay the same, for Acquisition method ROE is lower
the case is the same for ROA—>by using equity method ROA is higher due to lower asset and Net income is stay the same
Hope this help
Click to expand...
However, for the acquisition method ROE is generally calculated using Equity less Minority Interest. So they’re the same.
 
forumusernew wrote:
What about minority interest? Should we not take this into account? Cheers
Click to expand...
There is no minority interest in prop consolidation or equity method.
 
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