When I say consolidation, i mean acquisition method作者: onelife1 时间: 2011-7-13 15:00
Equity is the same under Proportionate Consolidation. If you consolidate. (acquisition method) then your equity will increase because you are writing up the net identifiable assets to fair value and thus increasing the book value/equity of the firm. NI is the same under all methods. If equity increases then your ROE will decline as a result. ROE is lowest under the acquisition method.作者: FinancialAnaly 时间: 2011-7-13 15:00
Under Equity Method, you only recognize your investment (at cost) on the B/S. No impact on Equity.
Under Proportionate Consolidation, you consolidate your % stake (usually 50%) of the subsidiary's Assets and Liabilities. Since you are only consolidating your share proportionally, there is no impact on Equity.
Under Consolidation, you consolidate the ENTIRE subsidiary, including the % you do not own. Because you have essentially over-allocated the subsidiary's assets, you create an account called Minority Interest to account for % not owned in the Subsidiary. Minority Interest goes directly into S/E - and thus Equity INCREASES.
Therefore, going from Equity Method to Consolidation means your Equity increases. And Net Income is the SAME under all THREE methods. Therefore;
Equity Method ROE = Net Income (same) / Equity (same)
Consolidation ROE = Net Income (same) / Equity (INCREASED by Minority Interest)
Same numerator, higher denominator -- therefore, ROE decreases under Consolidation.
(There are a lot more details to this, but the basics are there!)作者: ningning1984 时间: 2011-7-13 15:01
Thanks Chuckrox8, so to confirm
ROE will be the same for equity method and proportionate consolidation but will be lower under acquisition