NI- Equity and Acquisition method (FRA)

CFA Level II
#1

How is Net Income the same under Equity and Acquisition method?

Especially when the fair values of Revenues and Expenses are included in the case of Acquisition method and not under the Equity method.

Could some one suggest the reasoning behind this?

Perhaps provide an example as well.

Thanks

#2

Under the acquisition method you include 100% of the subsidiary’s revenue and expenses, then remove the minority share of net income, leaving you with your share of the net income.

Under the equity method you include your share of the net income.

They’re the same.

Suppose that the subsidiary has $100 in revenue and $90 in expenses. You own 60% of the subsidiary, and you have $1,000 in revenues and $850 in expenses.

Under the equity method you would show Income from Affiliate of $6 (= 60%($100 − $90)), so your net income is $1,000 − $850 + $6 = $156.

Under the acquisition method you would show revenues of $1,100 (= $1,000 + $100), expenses of $940 (= $850 + $90), and Minority Interest in Income from Affiliate of $4 (= 40%($100 − $90)), so your net income is $1,100 − $940 − $4 = $156.

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#3

Thanks a lot for the detailed explaination smiley. The numerical explaination helps a lot.

I wish the Wiley Guides did the same rather than state it in text. It would have made more sense in numbers.

Is it the same treatment in the I/S for partial and full-good will as well? NI stays among the two methods as well.

#4

You’re welcome.

Goodwill doesn’t affect the income statement.

#5

I meant for the NI values with NCI in the case of partial and full goodwill methods used.

#6

I understood that.

Goodwill doesn’t appear on the income statement.

Net income is the same under the equity method, the acquisition method with partial goodwill, and the acquisition method with full goodwill.

Goodwill doesn’t affect the income statement.

#7

Could u tell me the difference between Propotionate Consolidation and Equity method?

Is the accounting treatment for Propotionate Consolidation similar to Equity method (associates) or the Acqusition method (business combinations).

I came across an EOC that says Equity values are same under Propotionate Consolidation and Equity method.

#8

Proportionate consolidation may be in rare situation applied on joint ventures thus 2 subjects own 50 % in third subject. By proportionate consolidation method each of those 2 consolidates A, L, R and X proportionate to its share in this subject with no minority interest shown unlikely to an acquisition method. The impact on BS and PL positions thus on financial ratios of parents is approx. between the impact of applying acquisition method and equity method.

#9

Thanks again :slight_smile:

#10

Could u explain how equity remains the same under the acquisition and equity method?

#11

It depends on what you mean by “equity”.

As long as you don’t include the noncontrolling interest, the equity remains the same. (It doesn’t if you include the noncontrolling interest.) Under the acquisition method you do not consolidate equity; you simply use the parent’s equity (preferred stock, common stock, additional paid-in capital, retained earnings, treasury stock).

If you think about it, it makes sense. Equity is contributed capital (capital stock plus additional paid-in capital) plus retained earnings, less treasury stock. Contributed capital doesn’t change from one method to another, and, as net income is the same, retained earnings doesn’t change.

#12

By equity under the acquisition method, I meant without the consideration of NCI.

With the consideration of NCI- Equity is highest to lowest :- Full Goodwill —> Partial goodwill ----> Equity Method. Would like to clarify if this is correct.

Thank You so much for the explanation smiley. It makes perfect sense now.

There seems to be many different practise questions dealing with these methods in particular. Especially including the effect on ratios.

#13

That’s correct.

My pleasure.

I like it when things make sense.