Focus on the Citigroup parent company income statement for 201T. This income sta
ID: 2331004 • Letter: F
Question
Focus on the Citigroup parent company income statement for 201T. This income statement reflects all of Citigroup's controlled subsidiaries using a variant of the equity method. Look carefully at this statement. What is different about the equity method accounting being used here from the "classic" equity method that we have been looking at in class? 1. 2. From which entity's vantage point is the Citigroup parent company income statement constructed? What information is being reflected here that would not be reflected in either a consolidated income statement or under the classic equity method?Explanation / Answer
1)
The Equity Method
The equity method of accounting is used to determine the net income generated from the joint venture partnership in proportion to the size of a company's investment in the venture. First, the investment is recorded at cost, and then adjustments are made either up or down, depending on the venture's current value and the expenses associated with it. Any income earned on the investment must be recorded on the company's income statement.The value reported by each company represents only that firm's relative share of the costs and assets. This method of accounting is more commonly used when one company in a joint venture has a recognizably greater level of influence or control over the venture than the other.
If a firm comes to a point where it is no longer maintaining any significant level of control over the investment, the equity method can no longer be used. At that point, a new value is recorded in the company's profit and loss records, determined on the basis of current cost.
The Proportional Consolidation Method
The proportional consolidation method of accounting records the assets and liabilities of a joint venture on a company’s balance sheet in proportion to the percentage of participation a company maintains in the venture. In calculating those assets and liabilities, this company lists all income and expenses from the joint venture and includes them on its balance sheet and income statement. Those favoring this method argue that it provides a more accurate and detailed record, because it breaks down how well a joint venture performs. It lets each company see the operational effectiveness of various steps in the joint venture process and identify potential threats to profitability arising from such things as production costs, shipping costs or profit margin.
2) Consolidated Income statement constructed related with Banking company