Minority interest ROE calculation - Consolidation

[rpradeephere]

1. In full goodwill/partial goodwill method we have something called the minority interest in the shareholder’s equity (SE) part. Now, when we calculate ROE, should this minority interest be considered as a part of shareholder’s equity or not?
If we consider it a part of SE then ROE’s for full goodwill/partial goodwill methods will be different. If we do not consider minority interest to be a part of equity, ROEs in Full goodwill/partial goodwill must be same. Which is correct? This is getting me confused. Help!!
2. Has anyone come across cases where in proportionate consolidation method, goodwill is present? It is not discussed in CFAI book itself. Goodwill is discussed in Equity Method and Consolidation in CFAI but not in the Proportionate Consolidation method. Neither does Schweser touch this area. I just want to make sure that goodwill will not arise in PCM problems?

 

[lmb]

Minority Interest only arises with full Consolidation, as there’s no need for the equity adjustment under the other proportional methods. It is included in Total Equity, but then removed appropriately from Shareholders’ Equity lower down (which is the “reality” for common stock holders).
Schweser screwed up on this and gave ratios based on equal Equity values across the three methods, whereas in fact, because ROE uses Total Equity (which oddly includes any MI), Consolidation leads to lower ROEs.
US GAAP uses Full Goodwill; IFRS typically uses Partial Goodwill, but allows the use of Full. Under Full the entire target company’s goodwill (based on the implied price, arrived at by scaling up the share purchase, minus the fair value of the company’s net assets) is assumed on the parent’s books; under Partial it is just the share of the this excess that is booked.
It’s important not to confuse the issues of Equity/Prop Cons./Full Cons. with Full/Partial Goodwill. They are distinct. For example, you can have Full Consolidation with Partial Goodwill, or Prop Consolidation with Full Goodwill. The Goodwill decision doesn’t affect Net Income, as only the tangible assets are depreciated/amortized.
On day one, under Full GW MI gets its share of the purchase price (i.e. Fair Value), whereas Partial MI gets less (where GW is positive), because it gets its share of the Fair Value OF THE UNDERLYING NET ASSETS.