Consolidated and Equity

Consolidated accounting reflects all the activities and its subsequent performance by the holding firm while equity accounting shows the retained earnings held by an affiliated company wherein the firm has stake on it.  Exemplified by the Cheung Kong financial data is consolidation of venture performance with less transparency in individual performance of affiliated companies.  As a result, investors could believe that they are earning or increasing their value within these affiliated firms, however, the absence of individual annual financial performance could be a loophole in accounting methods of the diversified-holding firm to the detriment of investors.

In the holding firm’s 2004 report, it conceded that it will diversify through acquisitions.  As such, the management presented a 126-page report highlighting the advantages of infrastructure industries where investors can exploit off.  However, in its 2005 report, a minimal 48-page disclosure that did not have the similar emphasis on 2004 highlighted industries rather it hid their individual performance in consolidated financial statements.  To arrive at earnings per share and its specific computations are not disclosed that could imply management’s playing-safe to prevent investor queries.  As a result, investors would be easily manipulated showing them relatively high profits but limitedly so as no one knows how affiliate firms contribute to this amount and to what extent.

Due to this, it can be emphasized the significance of equity accounting over the consolidated statements in this case for investors to polish and rationalize their voting rights when the holding company is making a decision.  The comprehensiveness of the latter is of little importance to the reliability of the former in terms of promoting sound management, investor-executive relations and accounting ethics.  The inclusion of affiliate companies in a corporate portfolio necessitates financial disclosure of these firms to provide the background for investors to base their future investment activities and leverage their business risks.  Supposed that two or three of these affiliates are year-on-year declining in business performance.   Investors may not know this fact and continued to be allured by consistent but increasing in a negative direction dividends and share value.  They might continue to believe the managerial capabilities of the holding firm’s managers until such time that failure of affiliated companies is felt by drastic decline in share value or divestment.

Therefore, it is a recommendation to incorporate in the annual reports of the holding firm Cheung Kong equity accounts to show retained earnings and ample business performance measures of the individual affiliates.  The consolidated accounts would then serve as reference for “too busy” investors.  Even though there are investors that may find equity presentations are of little importance, there are definitely others who would want to glimpse them simply because it can affect the value of the holding company in which they have their individual stakes.  It will inculcate to corporate stakeholders managerial concern and accounting ethics that could enhance investor support for more acquisitions since they know they could have a black-and-white copy to monitor their performances.                 

 

References: Wikipedia, Investopedia

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