CFAI FRA Reading 22 EOC Question 12 target, include, highest, situation, all

bluejazzy

Would’nt Net Income be the highest under a Control situation where you have to include all of the targets Net Income in the parents Net Income? Under the Equity Method you would just include the proportionate amonut of Net Income of the target in the parents Net Income. Am i wrong here?

RobertA

I am not so clar on this…
Parent Z’s NI=75        50% Sub O’s NI = 68
Control Net Income on Z’s Consolidated Income Statement = 75+68 = 143
Sig Infl It is 75+68 = 143;
             however there would be another line item that says
              Min Int share of Net Income =
So then, what would be the profit margins in both cases?
Can you please help?

Spongebob

Net income available to equity share holders remains the same under both situations.  This is because on the consolidated income statement you will have a line which represents the share of the net income that belongs to the minority share holders and this reduces net income to truly what belongs to the equity shareholders of the company.  Hence the net income is same but revenue base is larger so profit margin will be lower.