BetterCare is currently forming a 50/50 joint venture with Supreme Healthcare under which the companies will share control of several hospitals. BetterCare plans to use the equity method to account for the joint venture. Supreme Healthcare complies with IFRS and will use the proportionate consolidation method to account for the joint venture.
Erik Ohalin is an equity analyst who covers both companies. He has estimated the joint venture’s financial information for 2018 in order to prepare his estimates of each company’s earnings and financial performance. This information is presented in Exhibit 1.
Exhibit 1:
Selected Financial Statement Forecasts for Joint Venture ($ Millions)
Year ending 31 December | 2018 |
Revenue | 1,430 |
Operating income | 128 |
Net income | 62 |
31 December | 2018 |
Total assets | 1,500 |
Shareholders’ equity | 740 |
Supreme Healthcare recently announced it had formed a special purpose entity through which it plans to sell up to $100 million of its accounts receivable. Supreme Healthcare has no voting interest in the SPE, but it is expected to absorb any losses that it may incur. Ohalin wants to estimate the impact this will have on Supreme Healthcare’s consolidated financial statements.
If Supreme Healthcare sells its receivables to the SPE, its consolidated financial results will least likely show:
- a higher revenue for 2018.
- the same cash balance at 31 December 2018.
- the same accounts receivable balance at 31 December 2018.
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