1. A JV is when two or more parties share control. Nobody gets to run the important decisions alone. CFA is clear on this: joint control only exists if there’s a contract that locks it in. No contract, no JV. Period.

2. Acquisition method: You bring in 100% of the assets and revenue, even if you only own 60%. Then you separately park the other 40% as non-controlling interest so the numbers still add up.

3. Proportionate consolidation: You only ever report your 60% slice of the assets and revenue. Nothing from the other side ever hits your books, so there’s no non-controlling interest to show.

4. Equity method: You don’t drag the investee’s assets, liabilities, revenues, and expenses onto your statements line by line. You just show one investment line on the balance sheet and one income line on the income statement. CFA calls this “one-line consolidation.”

MEMORISE THESE NUMBERS

PROPORTIONATE CONSOLIDATION METHOD

1. Increase Assets and Liabilities, Cash offset Equity. For proportionate consolidation, keep this in mind: all assets, except the cash paid, will increase by the proportionate amount of ownership the parent took in the venture. Liabilities and loans will also jump by that same proportionate amount. The cash, on the other hand, will decrease by the amount paid to buy in - and that cash comes straight out of the shareholders' pocket. So, equity remains untouched, unless you managed to pay less than the book value, in which case the bargain gets closed through retained earnings. If you overpay, you would create goodwill on the asset side.

ACQUISITION METHOD

1. Under the acquisition method, you take the reins completely - every single asset is yours to claim. You've got to transfer 100% of those assets, minus the cash you paid out, straight to your balance sheet. You make a one-line entry on the liability side for the residual value of the minority interest, because even though you only own 80%, your assets just got a 100% bump - something's got to offset that.

TREATMENT UNDER IFRS

1. Things get interesting and important here, because IFRS and US GAAP take different approaches. IFRS says you need to record partial goodwill, which means that since you only own 80% of the company, the remaining 20% of the company's net assets - that's the amount you overpaid - should be recorded as a partial goodwill entry on the asset side of the balance sheet. This implies that nothing changes on the liabilities side, because the over-payment of cash will offset the partial goodwill entry.

TREATMENT UNDER US GAAP

1. Under US GAAP, we first need to calculate the fair value of S's equity. The current equity plus retained earnings of S is $10,000, but you're willing to pay $10,000 of cash for just 80% of it. So, your fair value estimation of their equity's worth is $10,000 divided by 0.8, which is $12,500.
2. Now, identify the fair value of the assets - this would probably be given in the question. Currently, their net assets are $10,000, which is $24,000 in total assets minus $14,000 in loans. Suppose the company's P's analysts estimates that the net assets are fair-valued, the same as they are on the books, and would stand at $10,000.
3. So the full goodwill treatment under US GAAP is the total worth of Company S's equity minus the fair value of its net identifiable assets - in this case, that comes out to $2,500.
4. We calculate the minority interest by multiplying the fair value of equity (worth of S), $12,500, by the minority ownership stake of 20%, which gives us $2,500.

ONE LINE CONSOLIDATION

1. This is simplest of all the methods. Company B buys Company S and shows it in the balance sheet as a one line entry which is called "Investment in S". Nothing else changes.

Special Purpose Entities

1. Special purpose entities are the Enron way: you create a paper company for each small unit of work, yet you still bear the risk and liabilities yourself.
2. Earlier, these entities were created off‑balance‑sheet, letting you artificially inflate financial ratios—exactly what Enron did. They became a breeding ground for scandals.
3. Now they are known as variable purpose entities, which is the term that FASB uses. These entities are rigorously defined; their shareholders lack at least one of these: first, the decision‑making rights; second, the obligation to absorb complete losses; third, right to claim residual return.
4. Just remember it like this: they don’t take part in either decision‑making or financing stuff.
5. Say the parent company wants to set up a variable interest entity for R&D and fund it with a million euros.

The €1m investment in VIE and €1m VIE equity cancel on consolidation.

This is the core consolidation mechanic in the FSA treatment of SPEs/VIEs.