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ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Orion Group has profit after tax of $60m, with $54m attributable to owners of the parent. Average equity attributable to owners of the parent is $450m and total average equity including non-controlling interest (NCI) is $500m. A new subsidiary was acquired at the start of the year, and the group chose to measure NCI at fair value, resulting in higher goodwill. Which statement is correct?

Return on parent equity is 12%, being $54m over $450m. Choosing fair value for non-controlling interest recognises full goodwill and raises equity, so the ratio is lower than under the proportionate method. Using total equity would wrongly mismatch parent profit with NCI-inclusive equity.

  1. AReturn on parent equity is 12%, and using fair value for NCI increases goodwill and equity, which lowers return on equity compared with proportionate shareCorrect
  2. BReturn on parent equity is 12%, and the NCI choice has no effect on equity
  3. CReturn on parent equity is 10.8%, because profit must be divided by total equity
  4. DReturn on parent equity is 12%, and using fair value for NCI decreases goodwill, which increases return on equity

Explanation

Parent ROE = 54/450 = 12%. Measuring NCI at fair value recognises full goodwill, so NCI and total equity are higher than under the proportionate method, and any impairment of that goodwill would also be shared with NCI. The higher equity base lowers returns on a like-for-like basis. Dividing by total equity gives 54/500 = 10.8%, which mismatches numerator and denominator.

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