FSA - which method has highes Equity? 2010, accounting, investment, question, control

himanshumh

I'm a bit confused with an FSA question in the CFA book, page 66.

(Q3) At 31 December 2010, Cinnamon's (the acquirer) shareholder's equity on its Balance Sheet would most likely be:

a) highest if Cinnamon is deemed to have control of Cambridge (the target) [Acquisition Method]
b) independent of the accounting method used for the investment in Cambridge
c) highest if Cinnamon is deemed to have significant influence over Cambridge [Equity Method]

I put B since Kaplan says Equity stays the same under all three methods.

CFA states that the Acquisition Method would increase Equity because of the Minority Interest account. Though I understand this, I always thought Minority Interest was a negative equity account, and hence would cancel out the higher "reported" equity under consolidation. Thus, Equity stays the same across all three methods.

I'm just confused as to what to put on the exam.

5566

In equity section - Minority Interest is an ADDITION.

On the Net Income - Minority Interest is a DEDUCTION.

Check it out.

CP

wizofoz

it helped me to think of the accounting equation

A = L + E

The left is what you do own. The right hand side is what you don't own. its your capital base, what you gave up to fund A.

for example when the company issues common stock, they get cash to buy operating assets. So E goes up and A goes up by same amount. That is the same as issuing bonds except your giving up ownership instead of an IOU.

so common stock - part of company that is owned by someone else (public).
MI - part of investment owned by someone else (who knows)

ppls

i always thought MI was a negative to equity as well.

If I consolidate under acquisition method with say 80% ownership, I'm reporting assets and liabilities on my books that are not MINE....20% not mine.

so wouldnt I have to remove that minorty 20% from my books by putting a negative value (Minorty interest) in equity???

CPATrader

Similar to ryanwtyler, I am thinking about it based on the balance sheet equation (not sure if this is the correct way to think about it but it works for me). Assets and liabilities increase and include the total value of the acquired company, including the Non-controlling interest. Equity needs to be offset by some amount to keep the equation in balance and that amount is the NCI that isn't reflected in equity but is reflected in assets and liabilities...

FYI Schweser contradicts this and says equity decreases by NCI and therefore stays the same under all methods (equity, prop con, and con)...I am going to assume it is best to go with CFA here. This shows up in their EOCs and the mock test from what I remember.

busterbluth

Schweser was VERY wrong in the notes. FULL of Eratta. buncha bums.

Go with CFA.

Makes sense now though....Assets and liab both go up so E has to go up to balance

Houjichasan

> If I consolidate under acquisition method with say 80% ownership, I'm reporting assets and
> liabilities on my books that are not MINE....20% not mine.

> so wouldnt I have to remove that minorty 20% from my books by putting a negative value
> (Minorty interest) in

If you are adding 20% to your assets, and then you suggest to deduct 20% from the (L+E) side, how's your B/S balanced? So, you need to add 20% to the right side.

troymo

The equity would be the highest under the full goodwill method under the acquisition method. You are taking the minority interest of the full fair value of the sub vs the partial goodwill method where you would be taking the minority interest of the net identifiable assets.