2011 Mock PM Q37 question, companies, accounting, 2011

Walex

I've posted this question before but didn't get a clear reply.
It seems to me that AdOre Ventures is a joint venture formed by three companies (two that follow US GAAP and one that follows IFRS).

Q37 asks which accounting treatment is most appropriate.
Both in the CFA text and Schwesser, it was stated that IFRS's accounting treatment for joint venture is proportionate consolidation (while also allowing equity method) and US GAAP's accounting treatment for JV is equity method.

In that case, why is choice (b) wrong?! Glace follows IFRS and owns 30% of the joint venture. So shouldn't it use proportionate consolidation??

Moreover, I can't quite understand why (c) is the right choice. Cupercino follows US GAAP, so shouldn't it use equity method, not consolidation method (aka acquisition method)?!

Clarification would be extremely appreciated. Thanks!



Edited 1 time(s). Last edit at Monday, May 30, 2011 at 09:42PM by pkim182.

SFoyil

from my understanding the only reason b is wrong is because C is the "better" answer.

Glace follows IFRS and has an OPTION to report propor. or equity. while Cupercino has CONTROL, it is the only company with control of the JV hence has to report under consolidation.

The other two companies do not have control over the JV.

Although "b" would be right...."c" is just the "better" answer because Cupercino has no other option but to report under consolidation.

wizofoz

If they only own 20%, not 30% then it is not a JV.

Cupernico has CONTROL OVER ADORE, therefore consolidate it

cv4cfa

sorry that first line is confusing- i was correcting you b/c they own 20% not 30%. But they use equity method...I disagree with you toronto, Glace must use equity method b/c they have SIGNIFICANT INFLUENCE

stalkey

Thanks it makes a little bit of sense, but can I perhaps ask you one more clarification?

It seems to me that you are saying if a parent company has a control over JV, that parent company must use acquisition method not proportionate consolidation. However, if you look at Schwesser pg 85, the parent company that follows IFRS still uses proportionate consolidation when it owns 80% of the JV.

I guess I am more confused by the fact that neither CFA text or Schwesser addressed control issues within JV structure.

Lastly, where does it state that you must use equity method over proportionate consolidation when there is a significant influence? I haven't come across that yet....



Edited 1 time(s). Last edit at Monday, May 30, 2011 at 10:00PM by pkim182.

profil

that schweser page is correct- but they are talking about a strict JV.

This example is not a strict JV in the first part, 2009, Cupernico has control and hence uses consolidation method.

Significant influence requires equity method. That is just a basic rule of equity method.

flyinggirl

c looks better because proportionate consolidation is better when JV is 50/50.
I was hoping Glace complied with GAAP when doing this question