Analyzing and interpreting Disciosures on Equity Method investmentS Cummins, Inc

Question

Analyzing and interpreting Disciosures on Equity Method investmentS Cummins, Inc. (CMI) reports investments in affiliated companies, consisting mainly of investments in nine manufacturing joint ventures. Cummins reports those investments on its balance sheet at $734 million, and provides the following financial information of its investee companies in a footnote to its 10-K report: As of and for the vears ended December 31 (in millions) 2010 2009 2008 Net sales Gross margin Net income Cummins share of net income Rovalty and interest income Total equity, royalty and interest income from investees Current assets Noncurrent assets Current liabilities Noncurrent liabilities $7,107 5,554 $6,610 1,509 498 $231 1,651 668 $ 321 30 1,365 427 $196 18 $214 $ 253 5 351 214 $2,741 2,005 1,253 1,123 (1,837) (1,406) (390) $1,658 $1,332 $ 734 587 (499) Net assets Cummins share of net assets (a) What assets and liabilities of unconsolidated affiliates are omitted from Cummins's balance sheet as a result of the equity method of accounting for those investments? Assets 0 Liabilities0 x millions) x ($ millions)

Explanation / Answer

In equity method of accounting, an entity, reports only it's share in the profit or loss or assets and liabilities of the joint ventures. Therefore Cummins Inc has reported it's share in all assets and liabilities. Here, following assets are ommited from Cummins balance sheet -

1. Assets completely owned by another joint venturer, which is used for this joint venture only

2. Liabilities due paticularly on or more joint venturer, except Cummins inc.

Thus all assets and liabilities are considered in the consolidated statement to the extent of it's share in the joint venture.

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