Intercorporate Investments - Schweser Mistake reported, interest, includes, flash

MarginofSafety

Hi all,

Im reviewing flash cards from Schweser about intercorporate investments. One of the cards reads (card 18/50 for FRA)

"All three methods (equity, acquisition, prop consolidation) report the same equity". Maybe im mistaken, but i thought acquisition method reported higher equity as it includes minority interest, whereas the other methods do not include MI. I think the Schweser book says the same thing, so just a heads up for anyone using the flashcards.

hassan

Also, on question 9 of EOC in CFAI for Intercorp Investments, why dont they subtract out the proportionate share of dividends paid from equity income? They added the proportionate share of income, but did not take out the proportionate share of dividends so im confused.

Thanks

redskins44

I can't comment on your first post because I didn't use Schweser. But is does sound incorrect - equity method should have lower equity than prop consolidation as you mentioned.

Re: dividends

dividends are considered return of capital and are used to reduce the investment in associates. It will reduce the B/S value by the [EDIT: proportionate] dividend amount. But it wil have no effect on the I/S. The dividends paid by the associate has no effect on the equity income from investment in associates.



Edited 1 time(s). Last edit at Tuesday, May 3, 2011 at 10:57PM by Iginla2010.

firat

I use schweser as well, but i dun use the flash cards.
but I can guarantee you that only NI is the same under 3 methods.
Share hold equity is highest in Consolidation, and lowest under Equity method.



Edited 1 time(s). Last edit at Wednesday, May 4, 2011 at 01:42AM by passme.

economicz

Minority interest is not part of equity in some reporting.

SpyAli

"All three methods (equity, acquisition, prop consolidation) report the same equity". Maybe im mistaken, but i thought acquisition method reported higher equity as it includes minority interest, whereas the other methods do not include MI. I think the Schweser book says the same thing, so just a heads up for anyone using the flashcards.



Maybe they forgot to update their cards from year to year.

It use to be allowed under GAAP or IFRS (forgot which) to report minority interest outside equity which would make all 3 have the same equity.

But even then, it was not a pure fact. Cause it was an option to report outside equity and not a requirement.

I think for the purpose of this exam they want us to assume acquisition gives higher equity and thus lower ROE.

If I am not mistaken I remmber Dr. Holmes in the Schweser vids making a note about it. It was something like :"ROE would no be higher because the analyst would remove minority interest out of equity before calculating. Nevertheless that is what CFA wants you to say."



Edited 1 time(s). Last edit at Wednesday, May 4, 2011 at 01:03PM by gulfcfa.