Please help with these two questions.
Reading 19 Q7: The solution doesn’t make much sense to me. Can anyone use another way to explain?
Reading 19 Q12: I thought if Zimt has control of Oxbow, its NI would be NI(Zimt) + 100%NI(Oxbow), i.e. 75+68=143 and if Zimt has significant influence over Oxbow, its NI would be NI(Zimt) + 50%NI(Oxbow), i.e.75+68x50%=109.
Thanks a bunch!
Pablosad
Regarding Q12: your thinking is generally correct BUT what is assumed by CFAI is that Net Income is actually synonymous with the net income attributable to shareholders of the parent company. So this is the income left after taking into account that 50% of the 68 generated by the subsidiary is attributable to minority shareholders (non-controlling interests). That way, you end up with 109 (not 143).
Regarding Q7: not really sure what is causing you problems here - if the shares are classified as trading instruments, then any change in their fair value goes to P&L (a loss of €3 million) together with any dividends received (10% of 20 million, so income of €2 million). The net effect is therefore a 1 million loss that was taken to earnings.
Hope this helps. Take care!
Hi Wojtek,
Thanks for the reply. Q12 is clear now, that was something I didn’t know.
For Q7, I thought since the investee company has 60 NI, then 60 x 10% = 6 mil should be accounted into Zimt’s NI. So this is where I started off. With the 2mil dividend, I was already at 8 mil during my calculation.
Although I understand the correct answer after your explanation, can you please point out why I should not start with the 6 mil as a starting point? Specifically I was confused with the relationship between the 6 mil investee’s NI and the 3 million loss. I thought they would be added together (and then add the 2 mil div) to get to the final answer.
Thanks!
Ok, no problem 
What you seem to want to do is consolidate your share of the investee’s net income, as you would for companies deemed to be associates. However, when the share ownership is below 20%, we assume that the investor exercises neither control nor significant influence, so the investee is neither a subsidiary nor associate. The Curriculum describes such investments as ‘passive’.
In fact, we treat the passive investment as a simple financial asset. Equity financial assets are classfied as Available for Sale or Trading. In both cases, they are measured at fair value (so the amount you show in the balance sheet is a reflection of the investment’s fair value). Any changes to fair value are passed through the P&L (trading instruments) or go directly to equity via O.C.I (available-for sale instruments). In addition to this, the P&L also shows any dividends received from/declared by the investee.
Let me know if you are ok now.
wojtek sir
plz make some notes on cyrrent vs temporal method.
what all points can come in exam
Uh-huh! Your explanation really clarified my confusion!
I really appreciate your help. I’m good now:) Thank you !
Wojtek,
Just wanted to clarify what you were saying about CFAI’s assumption that “NI is actually synonymous with the NI attributable to shareholders of the parent company”.
I found another example of this (I think), and please tell me if my understanding is correct.
Same chapter Q28, in the solution it says “Net income is the same using any of the methods”, where NinMount has acquired a 50% stake in Boswell. (the NI for either consolidation methods is 75+“10x50%”=80, indicating that the net income is the NI attributable to NinMount (the parent company), excluding that from Boswell.)
If I’m right, Q29’s solution “Net income is the same using any of the choices” is talking about the same thing.
Am I right?
Yes, you are correct, this is the same thing!
Watch out thought. You said … ‘excluding that from Boswell’. It should be: excluding the net income of Boswell (the subsidiary) which is attributable to the non-controlling interests (the other shareholders).
Right, that was good reminder. Thanks again!