ExxonMobil mini-case
(equity method investments and consolidation)
ExxonMobil maintains a number of investments in other entities that it owns between
20% and 50%. These investments are accounted for using the equity method: the prorata
share of the investee’s operating results are incorporated into earnings and the book value
of its investment account is equal to its prorate share of the investee company’s book
value of stockholders’ equity plus unamortized goodwill incurred at the time of
acquisition. This method is sometimes referred to as a “one-line consolidation” as the
final bottom-line impact on the investor’s financial statements is identical whether the
equity method or full consolidation is employed; only the amount of detail presented
within the statements will differ. The use of the equity method by the investor is
straightforward: the original cost of the investment is increased by the investor’s share of
the investee’s earnings and is decreased by its share of investee losses and by dividends
received.
The investment account described above represents the proportionate share of the
investee’s book value of stockholders’ equity. Neither the assets of the investee company,
nor its liabilities, are reported on the investor’s books. This represents a potential problem
for the decomposition of ROE into margin, turnover and leverage. Although the net profit
margin is unaffected, the total asset turnover (sales/average total assets) is potentially
overstated and the financial leverage (average total assets / average total stockholders’
equity) is understated both by the failure to include the assets of the investee.
The use of the equity method obscures the amount of capital required in the business and
the degree of financial leverage employed to achieve ROE. Analysts may, therefore, wish
to adjust the financial statements of the investor company before computing ratios. This
case is designed to give you insight into the types of adjustments an analyst might
consider. We will use the 2000 annual report of ExxonMobil, selected portions of which
follow. Please answer the following questions:
1. Compute the decomposition of ROE into profit margin, turnover and financial
leverage for 2000 (use year-end figures rather than averages for the assets and
liabilities).
2. ExxonMobil reports total investments of $12,618. Included in this amount is
$6,864 representing its share of the book values of the stockholders’ equity of
companies it owns a minority interest in that are accounted for using the equity
method. These companies have total assets of $71,993 million and liabilities of
$54,668 (see note 8). The first adjustment we will consider is to fully consolidate
these investee’s with ExxonMobil. To do this, ExxonMobil would make journal
entries that would have the following effects:
Copyright © 2001 by Robert F. Halsey. All rights reserved.
Beginning balance
Elimination of investment account
relating to affiliates
Replace investment account with
affiliate assets and liabilities
Recognize claim on assets by
outside shareholders
Ending balance
Assets
149,000
(6,864)
Liabilities Equity
78,243
70,757
71,993
54,668
-0- (only ExxonMobil parent
company equity will remain in
consolidated totals)
10,461
214,129
143,372
70,757
Net assets, therefore, increase by $65,129 (71,993-6,864), and liabilities by
65,129. In addition, we need to add the sales of the investee’s ($81,371) to those
of ExxonMobil as none of these revenues are reflected in ExxonMobil’s income
statement. ExxonMobil’s net income, however, will remain the same as the
income it reports from its equity investment (included in its net profit) is equal to
the net income of the investee companies less the portion earned by the nonExxonMobil shareholders.
Now, recompute the ROE decomposition using the full consolidation
adjustments outlined above (use year-end figures rather than averages for the
assets and liabilities in turnover and leverage ratios).
3. A second adjustment an analyst might consider is called proportionate
consolidation. In this case we add only ExxonMobil’s proportionate share of the
investee company assets as follows:
Assets
Liabilities Equity
Beginning balance
149,000
78,243
70,757
Elimination of investment account
(6,864)
relating to affiliates
Replace investment account with
28,191
21,327
-0- (only ExxonMobil parent
EM’s proportionate share of
company equity will remain in
affiliate assets and liabilities
consolidated totals)
Ending balance
170,327
99,570
70,757
Net assets increase by $21,327 (28,191-6,864), as do liabilities. In addition, we
need to increase ExxonMobil’s revenues by its proportionate share if the investee
companies’ revenues of $32,452. Again, its net income will remain the same as
currently reported.
Now, recompute the ROE decomposition using the proportionate consolidation
adjustments outlined above (use year-end figures rather than averages for the
assets and liabilities in turnover and leverage ratios).
4. Evaluate your analysis under the three methods: as reported, full consolidation,
and proportionate consolidation. Which do you think gives the most informative
ROE decomposition? Under what circumstances might you consider full
consolidation and proportionate consolidation adjustments?
Copyright © 2001 by Robert F. Halsey. All rights reserved.
2000
1999
1998
______________________________________________________________________________________________________________________
(millions of dollars)
Revenue
Sales and other operating revenue, including excise taxes
Earnings from equity interests and other revenue
Total revenue
Costs and other deductions
Crude oil and product purchases
Operating expenses
Selling, general and administrative expenses
Depreciation and depletion
Exploration expenses, including dry holes
Merger related expenses
Interest expense
Excise taxes
Other taxes and duties
Income applicable to minority and preferred interests
Total costs and other deductions
Income before income taxes
Income taxes
Income before extraordinary item and cumulative effect of accounting change
Extraordinary gain from required asset divestitures, net of income tax
Cumulative effect of accounting change
Net income
Net income per common share (dollars)
Copyright © 2001 by Robert F. Halsey. All rights reserved.
$228,439 $182,529 $165,627
4,309
2,998
4,015
-------------------------$232,748 $185,527 $169,642
-------------------------$108,951 $ 77,011 $ 62,145
18,135
16,806
17,666
12,044
13,134
12,925
8,130
8,304
8,355
936
1,246
1,506
1,406
625
-589
695
568
22,356
21,646
20,926
32,708
34,765
33,203
412
145
265
-------------------------$205,667 $174,377 $157,559
-------------------------$ 27,081 $ 11,150 $ 12,083
11,091
3,240
3,939
-------------------------$ 15,990 $ 7,910 $ 8,144
1,730
----(70)
-------------------------$ 17,720 $ 7,910 $ 8,074
==========================
Dec. 31
Dec. 31
2000
1999
_____________________________________________________________________________________________________________________
(millions of dollars)
Assets
Current assets
Cash and cash equivalents
Other marketable securities
Notes and accounts receivable, less estimated doubtful amounts
Inventories
Crude oil, products and merchandise
Materials and supplies
Prepaid taxes and expenses
Total current assets
Investments and advances
Property, plant and equipment, at cost, less accumulated depreciation and depletion
Other assets, including intangibles, net
Total assets
Liabilities
Current liabilities
Notes and loans payable
Accounts payable and accrued liabilities
Income taxes payable
Total current liabilities
Long-term debt
Annuity reserves and accrued liabilities
Deferred income tax liabilities
Deferred credits
Equity of minority and preferred shareholders in affiliated companies
Total liabilities
Shareholders' equity
Benefit plan related balances
Common stock without par value (4,500 million shares authorized)
Earnings reinvested
Accumulated other nonowner changes in equity
Cumulative foreign exchange translation adjustment
Minimum pension liability adjustment
Unrealized gains/(losses) on stock investments
Common stock held in treasury (545 million shares in 2000 and 533 million shares in 1999)
Total shareholders' equity
Total liabilities and shareholders' equity
Copyright © 2001 by Robert F. Halsey. All rights reserved.
$
7,080
1
22,996
$
1,688
73
19,155
7,244
7,370
1,060
1,122
2,018
1,733
------------------$ 40,399 $ 31,141
12,618
14,544
89,829
94,043
6,154
4,793
------------------$149,000 $ 144,521
===================
$
6,161 $ 10,570
26,755
25,492
5,275
2,671
------------------$ 38,191 $ 38,733
7,280
8,402
11,934
12,902
16,442
16,251
1,166
1,079
3,230
3,688
------------------$ 78,243 $ 81,055
-------------------
$
(235) $
3,661
86,652
(298)
3,403
75,055
(4,862)
(2,300)
(310)
(299)
(17)
31
(14,132)
(12,126)
------------------$ 70,757 $ 63,466
------------------$149,000 $ 144,521
===================
8. Equity Company Information
The summarized financial information below includes amounts related to certain
less than majority owned companies and majority owned subsidiaries where
minority shareholders possess the right to participate in significant management
decisions (see note 1). These companies are primarily engaged in crude
production, natural gas marketing and refining operations in North America;
natural gas production, natural gas distribution, and downstream operations in
Europe and crude production in Kazakhstan and the Middle East. Also included are
several power generation, petrochemical/lubes manufacturing and chemical
ventures; 1998 and 1999 included amounts related to Mobil's European Fuels joint
venture which was divested as a condition of the Merger approval.
2000
1999
1998
_____________________________________________________
ExxonMobil
ExxonMobil
ExxonMobil
Equity Company Financial Summary
Total
Share
Total
Share
Total
Share
__________________________________________________________________________________________________________________________
(millions of dollars)
Total revenues
Percent of revenues from companies included in the ExxonMobil
consolidation was 7% in 1998, 8% in 1999 and 11% in 2000
Income before income taxes
Less: Related income taxes
Net income
Current assets
Property, plant and equipment, less accumulated depreciation
Other long-term assets
Total assets
Short-term debt
Other current liabilities
Long-term debt
Other long-term liabilities
Advances from shareholders
Net assets
Copyright © 2001 by Robert F. Halsey. All rights reserved.
$81,371 $32,452 $94,534 $32,124 $76,552 $24,740
----------------------------------------------------$ 7,632 $ 3,092 $ 4,100 $ 2,095 $ 4,104 $ 2,002
(1,382)
(658)
(734)
(449) (1,071)
(492)
----------------------------------------------------$ 6,250 $ 2,434 $ 3,366 $ 1,646 $ 3,033 $ 1,510
=====================================================
$28,784 $11,479 $21,518 $ 7,739 $19,037 $ 6,645
36,553
13,733
44,213
15,509
40,268
15,221
6,656
2,979
4,806
2,106
3,529
1,449
----------------------------------------------------$71,993 $28,191 $70,537 $25,354 $62,834 $23,315
----------------------------------------------------$ 2,636 $ 1,093 $ 2,856 $ 1,129 $ 2,628 $ 1,048
25,377
10,357
18,129
6,324
16,367
5,574
11,116
4,094
13,486
3,978
11,316
3,488
7,054
3,273
5,372
2,598
4,974
2,362
8,485
2,510
3,636
1,919
3,734
2,017
----------------------------------------------------$17,325 $ 6,864 $27,058 $ 9,406 $23,815 $ 8,826
=====================================================