ROE acquisition and equity method

[eldesiego]

Hi,
According to theory, shareholders’ equity shall be higher using the consolidation method than using the equity method. I have encountered a problem in one of Schweser’s mock exams in which this concept may be challenged (as long as I’m interpreting this right).
“Had EPI used the proportionate consolidation method instead of the equity method to account for its investment, which of the following statements is most accurate?”
a) Net profit would be the same
b) ROA would be the same
c) Return on equity would be the same
I see why the first two statements are wrong since sales and assets would increase. The right answer is c). but I thought equity would increase too using the consolidation method?
Thank you!

 

[Flashback]

Proportionate consolidation method is not the same as consolidation (acquisition method).
Proportionate consolidation method may be used at joint ventures by consolidation only proportion in venture subsidiary (exact 50 %).
Since proportion (%) of sub’s net asset in such case would be same as by applying equity method the ROE would be same.

 

[eldesiego]

Flashback, thank you!
so if using the proportionate consolidation yields the same outcome as the equity method, why are answers a) and b) wrong?

 

[eldesiego]

…i got it. Thanks!

 

[Flashback]

If you use proprortionate consolidation you consolidate exact 50 % of revenues, expenses, assets and liabilities.
If you use equity method for same 50 % share, ROE will be the same because NAV of the sub is same in parent’s BS.
Regarding other ratios, it may not be the same due to various impact on certain BS and PL positions. Proportionate consolidation is in the middle regarding financial ratios influence between acquisitiin method and equity method.
This is the tricky question and due to the fact that proportionate consolidation is a rare method, I am not sure what is the chance to appear in exam.