Summarising intercorporate investments

[Jaishank]

Equity method = Partial consolidation (except that Equity Method is depicted in one line)
Consoldiation = Acquisition Method
Equity & Proportionate Consolidation report same Equity.
Equity & Proportionate Consolidation report same Net Income.
Acquisition/Consolidation method shareholders equity will be highest.

Proportionate Consolidation and Equity - you will report your portion of the ownership therefore same amount of equity
NI is same for all 3 methods
Acquisition includes minority interest, therefore highest equity

ROA/ROE/Profitability: Equity Method > Consolidation

Controlling interest is Consolidation - NOT Proportionate consolidation.

Is this summary correct? Am I missing something?

 

[cgy5478]

Looks about right. GAAP and IFRS no longer allow the use of propotionate consolidation. When you have/assume “control” over the subsidiary, you must use the acquisition method and when you have “significant influence” over the subsidiary, you use the equity method. The equity is highest under full goodwill method, which is a requirement under GAAP, as you add NCI to equity (% of fair value). Pooling of interest uses book value of the subsidiary instead of the the fair value, so no goodwill will be recorded and assets and liabilities are less compared to acquisition method.

 

[Tommy83]

cgy5478 wrote:
GAAP and IFRS no longer allow the use of propotionate consolidation.

Doesn’t IFRS allow proportionate consolidation for joint ventures?

 

[Would You Look]

Tommy83 wrote:
^ Doesn’t IFRS allow proportionate consolidation for joint ventures?

I think both GAAP and IFRS require the equity method for joint ventures

 

[cgy5478]

Not anymore. Proportionate consolidation was the preferred method under IFRS before, but now both IFRS and GAAP REQUIRE the use of equity method for joint venture.

 

[Tommy83]

^ Thank you. I did some quick research online and you’re correct. It was recently changed (IFRS 11). I swear I looked at something a month ago that said IFRS allowed the choice of Equity Method and proportionate consolidation, but that must have been from older material.
Here’s a good example of not using older study material. Glad I read this thread.

 

[carbolic]

what about part “ROA/ROE/Profitability: Equity Method > Consolidation”
how come that ROE is higher under equity if NI is the same and Equity too?

 

[Would You Look]

carbolic wrote:
what about part “ROA/ROE/Profitability: Equity Method > Consolidation”
how come that ROE is higher under equity if NI is the same and Equity too?

I believe it’s because of the reported minority interest.

 

[Jaishank]

carbolic wrote:
what about part “ROA/ROE/Profitability: Equity Method > Consolidation”
how come that ROE is higher under equity if NI is the same and Equity too?

Under consolidation/acquisition if minority interest is present the total equity is higher —> total assets higher —> lower ratios.