I am still confused about FSA: equity method and consolidation and proportionate consolidation. in a case company A owns 50% share of company B. so under IAS, we could either use equity method or proportionate consolidation. for net income, because the 50% of earnings from company B will flow into company A’s income statement. why it said net income for company A is unchanged under equity method? Thanks. equity method: and it said the net profit margin is higher because sales are lower and net income are the same, and how? Thanks.
net income is the same under any method, equity is the same under any method -> ROE is the same Sales under consolidation > sales under proportional consolidation > sales under equity therefore, profit margin is smallest under consolidation < proportional < equity method
can anybody explain how net income is the same under any method? Thanks
I’ve just memorized it as a golden rule. Not sure the reasoning.
you only book the proportion of income in the P&L - e.g. if Company A own 40% of Company B whihc has a total net income of 1000 1. Equity method - income in Co A P&L = 0.4*1000 = 400 2. Consolisation method will add all accounts in P&L up but will deduct 60% of the portion not owned in minority interest. The net effect if same Net income all methods - just memorise this.
hw0799 Wrote: ------------------------------------------------------- > can anybody explain how net income is the same > under any method? Thanks Try an example with two companies and you will see.
Just think of it like this: You earned a given amount (say, $1m) in one year on your investment in another company. Consolidation/proportional consol/equity are just three different ways you can account for it. Consolidation means that you are counting it as part of your own sales/income, whereas with equity you are counting it as earnings on an investment. Kind of like salary vs. dividends/capital gains on stock investments. Its the same amount either way. (Hopefully that’s not more confusing, its just how I remember it.)