WEBVTT 1 00:00:01.575 --> 00:00:02.595 The second method 2 00:00:02.855 --> 00:00:05.635 of consolidation will look a bit like the first, 3 00:00:06.135 --> 00:00:08.315 but with a significant modification 4 00:00:08.865 --> 00:00:12.355 resulting from a change in investors' perspective. 5 00:00:13.225 --> 00:00:16.595 It's no longer a question of a limited equity investment, 6 00:00:17.055 --> 00:00:21.115 but often in industrial investment reflecting a real 7 00:00:21.835 --> 00:00:22.875 strategic commitment 8 00:00:22.895 --> 00:00:25.915 of the investor in the development of a project. 9 00:00:27.585 --> 00:00:31.915 What I am describing is frequently found in the construction 10 00:00:31.915 --> 00:00:34.355 of a joint venture with an industrial partner. 11 00:00:35.175 --> 00:00:38.955 On the other hand, this commitment does not result in taking 12 00:00:39.105 --> 00:00:40.275 control of the target. 13 00:00:41.065 --> 00:00:44.955 This method of consolidation is called the equity method. 14 00:00:45.865 --> 00:00:48.675 There's no change in the valuation of the target company. 15 00:00:48.785 --> 00:00:52.835 Obviously you remember we assessed the value at 300, 16 00:00:53.455 --> 00:00:55.635 the enterprise value, which is the value of equity. 17 00:00:55.695 --> 00:00:58.995 The market capitalization when the company is listed plus 18 00:00:59.175 --> 00:01:02.275 net interest bearing debt is 320. 19 00:01:02.905 --> 00:01:05.115 Capital employed, which is the amount of money 20 00:01:05.795 --> 00:01:08.195 invested in business operation is 80. 21 00:01:08.935 --> 00:01:11.675 The multiple, which is very well known as market to book, 22 00:01:11.815 --> 00:01:14.795 is enterprise value divided by capital employed. 23 00:01:15.465 --> 00:01:17.595 It's for, again, it means 24 00:01:17.595 --> 00:01:20.795 that $1 investor in the business is now worth $4, 25 00:01:21.005 --> 00:01:24.155 which is a consequence of a very profitable company. 26 00:01:24.775 --> 00:01:28.075 No, there is a quite significant change in the financial 27 00:01:28.075 --> 00:01:29.675 characteristics of the operation. 28 00:01:30.135 --> 00:01:33.675 The investor doesn't take any more 10% of equity stake, 29 00:01:34.095 --> 00:01:36.195 but 40% of equity stake. 30 00:01:36.735 --> 00:01:39.355 The investor is not going to buy shares issued 31 00:01:39.455 --> 00:01:41.915 by the target, so there's no capital 32 00:01:42.435 --> 00:01:43.715 increase on a target side 33 00:01:44.375 --> 00:01:47.435 and has the investor has enough cash in the bank account 34 00:01:47.535 --> 00:01:50.635 to pay for the acquisition to pay for the equity stake. 35 00:01:51.105 --> 00:01:54.635 There's no increase in the number of shares. 36 00:01:54.635 --> 00:01:57.715 There is no capital increase on the investor side as well. 37 00:01:58.745 --> 00:02:02.395 Basically, the target shareholders are selling part 38 00:02:02.395 --> 00:02:04.555 of their shares, not all their shares, 39 00:02:04.555 --> 00:02:08.715 but only 40% of them In terms of cash out, 40 00:02:08.825 --> 00:02:10.355 what does it mean for the investor? 41 00:02:10.545 --> 00:02:15.035 It's a disbursement which is 40% equity stake multiplied 42 00:02:15.035 --> 00:02:18.635 by 300 value of 100% of the shares. 43 00:02:19.095 --> 00:02:23.715 So 40% of 300 is 120 business as usual, 44 00:02:23.935 --> 00:02:25.955 the operation is going to be carried out on the 45 00:02:25.955 --> 00:02:28.675 1st of January of your n plus one. 46 00:02:29.055 --> 00:02:31.835 For a matter of simplicity in the calculation, 47 00:02:32.435 --> 00:02:34.155 I will follow exactly the same process. 48 00:02:34.805 --> 00:02:37.595 First, we are going to build the balance sheet on the 49 00:02:37.595 --> 00:02:39.075 1st of January, immediately 50 00:02:39.125 --> 00:02:43.235 after the acquisition, immediately after the equity stake. 51 00:02:43.945 --> 00:02:47.035 Then we'll observe the impact of these equity 52 00:02:47.715 --> 00:02:50.595 participation on the income statement on the p and l 53 00:02:50.815 --> 00:02:53.875 and on the cashflow statement of the investor. 54 00:02:54.505 --> 00:02:57.355 Last and not least, the construction of the balance sheet 55 00:02:57.495 --> 00:03:00.885 for the investor at the end of the period, 31st of December, 56 00:03:01.275 --> 00:03:02.525 year end plus one. 57 00:03:03.585 --> 00:03:05.405 The balance sheet on the first of Jerry 58 00:03:05.625 --> 00:03:10.125 for the investor looks a little bit like the one I presented 59 00:03:10.145 --> 00:03:11.645 for the financial investment. 60 00:03:12.615 --> 00:03:15.925 There will be a new equity stake, which is going to show 61 00:03:16.025 --> 00:03:18.805 as a financial investment in the non-car asset, 62 00:03:19.185 --> 00:03:20.845 and it's going to be paid by cash, 63 00:03:21.305 --> 00:03:23.885 so you increase the financial fixed asset, 64 00:03:24.025 --> 00:03:26.325 you decrement the cash by the same amount. 65 00:03:27.025 --> 00:03:29.245 No change in equity on liabilities 66 00:03:29.555 --> 00:03:31.405 because there is no capital increase 67 00:03:31.405 --> 00:03:33.045 because that does not change and 68 00:03:33.045 --> 00:03:36.565 because of course operating liabilities are absolutely not 69 00:03:36.925 --> 00:03:38.285 affected by this equity stake. 70 00:03:39.265 --> 00:03:42.935 Let's start first with the asset side. No change in the net. 71 00:03:43.175 --> 00:03:45.455 Tangible fixed assets, no change in the 72 00:03:45.455 --> 00:03:46.695 intangible fixed asset. 73 00:03:47.005 --> 00:03:50.815 Financial fixed assets are incremented by the amount 74 00:03:50.815 --> 00:03:54.535 of money we cashed out to invest in the equity stake. 75 00:03:54.995 --> 00:03:59.295 120 current operating assets, of course, no change 76 00:03:59.295 --> 00:04:02.815 because we have not yet started operating year end plus one 77 00:04:03.195 --> 00:04:06.815 and cash is out by the amount of money we had 78 00:04:06.815 --> 00:04:10.335 to cash out in order to invest in the equity stake. 79 00:04:11.975 --> 00:04:13.775 Absolutely no change in the total assets 80 00:04:14.045 --> 00:04:15.415 because in fact, 81 00:04:15.805 --> 00:04:19.055 investing in this equity stake has a double impact. 82 00:04:19.055 --> 00:04:22.375 With a trade off, you increase the financial fixed asset 83 00:04:22.515 --> 00:04:27.495 and you reduce cash by the same amount, plus 120 minus 120. 84 00:04:28.395 --> 00:04:29.615 As I previously said, 85 00:04:29.615 --> 00:04:32.615 there's absolutely no change in the equity and liabilities. 86 00:04:33.395 --> 00:04:37.095 No capital increase, no shareholders' equity impact. 87 00:04:37.645 --> 00:04:40.935 Long-term and short-term financial debt are not affected. 88 00:04:41.435 --> 00:04:45.335 Why? Because the equity stake is entirely financed by cash. 89 00:04:45.835 --> 00:04:49.375 Do you remember? No change in equity, no change in debt, 90 00:04:49.595 --> 00:04:52.095 and no change in the current operating liabilities 91 00:04:52.205 --> 00:04:56.015 because we have not yet started operating year end plus one. 92 00:04:56.765 --> 00:04:59.075 There was a significant change in the financial 93 00:04:59.075 --> 00:05:03.595 characteristics moving the equity stake from 10 to 40%. 94 00:05:03.975 --> 00:05:06.915 Now, there is a very big change in the economic 95 00:05:06.915 --> 00:05:08.635 characteristics of the operation. 96 00:05:09.105 --> 00:05:11.755 It's no more simple financial investment 97 00:05:12.455 --> 00:05:14.235 now it's a business investment. 98 00:05:14.695 --> 00:05:16.235 We invest in a business 99 00:05:16.495 --> 00:05:19.355 and we are very much interested in the 100 00:05:19.425 --> 00:05:20.755 development of the business. 101 00:05:21.375 --> 00:05:23.435 Of course, we don't control the business 102 00:05:23.435 --> 00:05:25.875 because we have less than 50% of the shares, 103 00:05:26.135 --> 00:05:30.435 but with 40% you have a significant influence on the 104 00:05:30.875 --> 00:05:32.595 decisions which are taken by the target. 105 00:05:33.335 --> 00:05:34.955 You have an influence on the strategy. 106 00:05:35.375 --> 00:05:37.715 You have an influence on the operations. 107 00:05:38.775 --> 00:05:40.315 Now you remember that as far 108 00:05:40.315 --> 00:05:42.075 as the financial investment was concerned, 109 00:05:42.455 --> 00:05:44.475 we were accounting for a financial income, 110 00:05:44.475 --> 00:05:46.915 which was the dividend paid by the target 111 00:05:47.415 --> 00:05:48.755 to its shareholders. 112 00:05:49.535 --> 00:05:52.395 Now, the dividend is kind of immediate remuneration. 113 00:05:53.095 --> 00:05:55.515 The dividend is no value creation. 114 00:05:55.935 --> 00:05:59.525 It is a transfer of the value which has been created 115 00:05:59.825 --> 00:06:02.285 by the company to its shareholders. 116 00:06:02.945 --> 00:06:04.845 You don't create value as a dividend. 117 00:06:04.945 --> 00:06:07.125 You transfer the value which was created. 118 00:06:08.305 --> 00:06:11.205 Now you understand that if we hold 40% of the target, 119 00:06:11.585 --> 00:06:15.965 we are quite interested not only in immediate remuneration 120 00:06:16.025 --> 00:06:18.645 but in the value which is created by the target, 121 00:06:19.625 --> 00:06:22.445 and value is related with performance 122 00:06:23.065 --> 00:06:25.805 and what measures the performance in the p 123 00:06:25.805 --> 00:06:29.005 and l is not the dividend paid by the company 124 00:06:29.065 --> 00:06:31.045 to the shareholders because it's not in the p and l. 125 00:06:31.225 --> 00:06:32.725 It is a net income. 126 00:06:32.745 --> 00:06:36.045 The bottom line, which is attributable to shareholders 127 00:06:36.705 --> 00:06:38.445 as it is attributable to shareholders. 128 00:06:38.665 --> 00:06:41.925 It is about the value which is created for the shareholders. 129 00:06:42.785 --> 00:06:43.925 Now, what is the impact of 130 00:06:43.925 --> 00:06:46.605 what I just said on the accounting information? 131 00:06:47.515 --> 00:06:50.325 Obviously the amount which was invested in target is 132 00:06:50.815 --> 00:06:52.285 quite significant. 133 00:06:53.345 --> 00:06:57.205 Now your duty is to provide information on the financial 134 00:06:57.965 --> 00:06:59.285 relevance of this investment. 135 00:07:00.025 --> 00:07:01.605 The shareholders they need to know, 136 00:07:01.745 --> 00:07:03.925 but also the stakeholders, the financial creators, 137 00:07:04.225 --> 00:07:05.365 and anybody needs 138 00:07:05.365 --> 00:07:08.005 to know about the relevance of the investment. 139 00:07:08.795 --> 00:07:10.205 Then it's about relevance, 140 00:07:10.205 --> 00:07:12.045 it's about performance and it's about value. 141 00:07:12.265 --> 00:07:15.245 You have to show the performance somewhere in your 142 00:07:15.245 --> 00:07:16.285 financial statements. 143 00:07:17.665 --> 00:07:19.925 Now in the p and l of the investor, you are going 144 00:07:19.925 --> 00:07:22.205 to show a share of the net income 145 00:07:22.785 --> 00:07:25.125 of the participation in target, 146 00:07:25.865 --> 00:07:28.005 and then this is about performance. 147 00:07:28.345 --> 00:07:31.845 It is about value, it's about relevance of the investment. 148 00:07:32.575 --> 00:07:33.725 Let's build a p and l. 149 00:07:33.865 --> 00:07:36.805 The income statement for your n plus one for the investor, 150 00:07:37.505 --> 00:07:40.405 no change in sales in EBITDA and depreciation. 151 00:07:40.795 --> 00:07:43.525 EBIT operating income is 126. 152 00:07:44.585 --> 00:07:46.645 Now we have excluded from the p 153 00:07:46.645 --> 00:07:49.325 and l, the financial income, which was a consequence 154 00:07:49.325 --> 00:07:52.765 of receiving 10% of the dividend paid by the target. 155 00:07:53.665 --> 00:07:54.805 We replay that by 156 00:07:54.875 --> 00:07:58.605 what is named earnings from affiliate companies. 157 00:07:59.355 --> 00:08:01.925 This affiliate company is a target. 158 00:08:02.465 --> 00:08:04.285 We have a significant equity stake 159 00:08:04.305 --> 00:08:06.725 and we show a share of the net income. 160 00:08:07.425 --> 00:08:10.005 Now, where does it show in a p and l? 161 00:08:10.515 --> 00:08:13.525 Here I present the earnings from affiliate companies 162 00:08:13.715 --> 00:08:14.885 next to the ebit. 163 00:08:15.545 --> 00:08:19.845 For some other companies, they prefer to present in their p 164 00:08:19.845 --> 00:08:23.325 and l, the earnings from affiliate close to the net income. 165 00:08:23.915 --> 00:08:26.285 There's absolutely no rule. 166 00:08:26.625 --> 00:08:30.325 You present it the way you like depending on how you want 167 00:08:30.325 --> 00:08:31.485 to present information. 168 00:08:32.185 --> 00:08:35.445 Now, let's go back to the p and l EBIT 126. 169 00:08:35.985 --> 00:08:38.885 We add the earnings from affiliate 24. 170 00:08:39.265 --> 00:08:42.645 We deduct the interest expense 30 and the earnings 171 00:08:42.645 --> 00:08:45.805 before tax is now 120. 172 00:08:46.745 --> 00:08:48.405 Of course, it's not a taxable income 173 00:08:48.405 --> 00:08:50.965 because the earnings you show in your p 174 00:08:50.965 --> 00:08:54.485 and l from affiliate companies have already paid income tax, 175 00:08:54.785 --> 00:08:57.005 So you don't pay taxes again, 176 00:08:57.585 --> 00:09:00.925 so the earnings from FE eight companies 24 are not going 177 00:09:00.925 --> 00:09:02.565 to increment the taxable income. 178 00:09:03.265 --> 00:09:06.005 You have to deduct these earnings from the earnings 179 00:09:06.005 --> 00:09:08.685 before tax in order to calculate the taxable income. 180 00:09:09.185 --> 00:09:12.285 You also remember that the dividend we are receiving from 181 00:09:12.285 --> 00:09:15.085 the target is not taxable. 182 00:09:15.415 --> 00:09:19.205 Under most circumstances though, at the end of the day, 183 00:09:19.425 --> 00:09:22.605 the earnings before tax is 120. 184 00:09:22.985 --> 00:09:25.125 The taxable income is 96. 185 00:09:25.625 --> 00:09:29.845 We pay 25%, which is 24, and the earnings 186 00:09:29.845 --> 00:09:34.205 after tax is 120 minus 24, 187 00:09:34.215 --> 00:09:35.605 which is 96. 188 00:09:36.195 --> 00:09:39.565 From p and l to cash flow statement, your n plus one 189 00:09:39.565 --> 00:09:43.325 for the investor EPDA minus interest expense, 190 00:09:43.605 --> 00:09:45.645 minusing income tax minus changing 191 00:09:45.645 --> 00:09:47.045 working capital requirement. 192 00:09:47.435 --> 00:09:50.085 Then the operating cash flow is 226 193 00:09:50.735 --> 00:09:53.285 minus capital expenditures free cashflow. 194 00:09:54.305 --> 00:09:56.965 But we receive a dividend from the affiliate company. 195 00:09:57.145 --> 00:09:58.685 We receive a dividend from the target. 196 00:09:59.465 --> 00:10:03.165 You remember in the financial investment it was 10% of 40, 197 00:10:03.175 --> 00:10:08.045 which was four 90, 40% of 40, which is 16, 198 00:10:08.585 --> 00:10:10.845 and it's getting into your cash account. 199 00:10:11.305 --> 00:10:13.725 So the change in the cash position is going to be the sum 200 00:10:13.725 --> 00:10:15.245 of the free cash flow generated 201 00:10:15.345 --> 00:10:20.045 by the investor 26 plus the dividend received from the 202 00:10:20.045 --> 00:10:23.765 company in which the investor holds 40%, 16. 203 00:10:24.105 --> 00:10:25.565 The sum is 42. 204 00:10:26.145 --> 00:10:29.005 Now we can build that balance sheet at the end of the year 205 00:10:29.025 --> 00:10:31.365 and we are going to start with equity and liabilities. 206 00:10:32.145 --> 00:10:34.805 No shares issue, so no change in capital 207 00:10:35.145 --> 00:10:36.605 and additional paid in capital 208 00:10:37.345 --> 00:10:40.445 retain earnings are incremented by the earnings generated 209 00:10:40.465 --> 00:10:41.765 by the company during the year, 210 00:10:41.825 --> 00:10:43.645 and you remember that the company does not 211 00:10:43.645 --> 00:10:44.845 distribute any dividend. 212 00:10:45.865 --> 00:10:50.525 So basically the 600 becomes 600 plus 96 earnings 213 00:10:50.525 --> 00:10:54.405 of the year minus no dividend, 696, 214 00:10:55.105 --> 00:10:56.325 no change in long term 215 00:10:56.745 --> 00:11:00.365 and short term non-Current current financial debt, 216 00:11:00.805 --> 00:11:02.805 respectively 400 and 200. 217 00:11:03.715 --> 00:11:07.125 Current operating liabilities are incremented by 10%, 218 00:11:07.125 --> 00:11:08.325 which was the initial assumption. 219 00:11:09.025 --> 00:11:11.645 And then we have the current liabilities plus a permanent 220 00:11:11.645 --> 00:11:14.685 capital, which give us a total equity on liabilities 221 00:11:14.785 --> 00:11:18.685 of 1,926 gross. 222 00:11:18.685 --> 00:11:20.645 Fixed assets have been incremented 223 00:11:20.705 --> 00:11:22.125 by the capital expenditures 224 00:11:22.265 --> 00:11:25.005 and accumulated depreciation by the depreciation 225 00:11:25.005 --> 00:11:28.525 of the year, so the net tangible fixed asset property plant 226 00:11:28.525 --> 00:11:32.725 and equipment moved from 800 to 826, no change, 227 00:11:33.625 --> 00:11:36.005 no modification of the intangible fixed asset, 228 00:11:36.145 --> 00:11:39.645 and you remember that we have invested 120 in 229 00:11:39.795 --> 00:11:41.165 financial fixed assets. 230 00:11:41.185 --> 00:11:45.645 The equity stake, the inventories, the accounts receivable, 231 00:11:45.645 --> 00:11:47.765 and the other current operating assets have 232 00:11:47.765 --> 00:11:49.125 increased by 10%. 233 00:11:49.745 --> 00:11:52.365 The cashflow statement gave us the increase in cash, 234 00:11:52.735 --> 00:11:54.605 Which was 380 235 00:11:54.855 --> 00:11:59.365 after we disperse 120 for the acquisition 236 00:11:59.625 --> 00:12:00.965 of 40% of the target. 237 00:12:01.705 --> 00:12:05.605 Now, the cashflow statement shows a bottom line of plus 42, 238 00:12:05.945 --> 00:12:10.485 change in cash, plus 42 cash at the end of the period 422. 239 00:12:10.905 --> 00:12:12.925 We calculate the sum of the non-current 240 00:12:13.185 --> 00:12:17.725 and the current assets and we get 1,918 241 00:12:18.745 --> 00:12:23.005 and it's not exactly 1,926, 242 00:12:23.255 --> 00:12:26.125 which is the total equity and liabilities. 243 00:12:26.415 --> 00:12:27.645 There is a difference. 244 00:12:28.305 --> 00:12:30.765 Now, let's first start to explain the difference. 245 00:12:31.825 --> 00:12:33.565 The difference first is calculated 246 00:12:33.745 --> 00:12:36.805 as 1,926 minus 247 00:12:37.025 --> 00:12:39.125 1,918. 248 00:12:39.785 --> 00:12:41.125 The difference is eight, 249 00:12:42.105 --> 00:12:45.365 but you remember that the retainer earnings were incremented 250 00:12:45.545 --> 00:12:48.925 by the net profit of the equity stake, 251 00:12:49.385 --> 00:12:50.925 so it was 24. 252 00:12:51.025 --> 00:12:54.205 24 is 40% of 60. 253 00:12:55.235 --> 00:12:57.565 What did we take into account on the asset side 254 00:12:57.565 --> 00:12:59.765 of the balance sheet, the cash at the end 255 00:12:59.765 --> 00:13:02.685 of the year includes a dividend, which is paid 256 00:13:02.685 --> 00:13:06.885 by the equity stake and it is 40% of 40, 257 00:13:07.705 --> 00:13:12.125 so you understand that the difference is 24 minus 16, 258 00:13:12.505 --> 00:13:13.685 it is eight, 259 00:13:14.145 --> 00:13:18.725 and it's 40% of 60 minus 40% of 40. 260 00:13:19.415 --> 00:13:21.045 Let's try to interpret a little bit 261 00:13:21.045 --> 00:13:22.565 what happened in the accounts. 262 00:13:23.015 --> 00:13:27.045 40% of 60 minus 40 is 40% 263 00:13:27.605 --> 00:13:29.165 multiplied by the difference 264 00:13:29.165 --> 00:13:31.165 between the net income generated 265 00:13:31.185 --> 00:13:34.685 by the company minus a dividend paid to the shareholders. 266 00:13:35.705 --> 00:13:38.725 You remember that net earnings minus dividend is in fact 267 00:13:38.725 --> 00:13:41.325 what is incrementing the retain earnings, 268 00:13:42.225 --> 00:13:44.805 and of course if you look at the equity of the target, 269 00:13:45.185 --> 00:13:48.365 it goes up from 60 to 80. 270 00:13:48.785 --> 00:13:51.805 It has been incremented by 20, which is a difference 271 00:13:51.805 --> 00:13:54.445 between, again, 60 and 40. 272 00:13:55.585 --> 00:13:59.845 We have now to find a way to show the accounting revaluation 273 00:13:59.845 --> 00:14:03.525 of the target in the accounts of the investor. 274 00:14:04.665 --> 00:14:07.925 How are we going to proceed on an accounting point of view? 275 00:14:09.395 --> 00:14:12.775 We have to provide an information on a reevaluation 276 00:14:12.955 --> 00:14:14.935 of the equity of the target, 277 00:14:15.915 --> 00:14:18.655 and it's going to show as a reevaluation of the assets 278 00:14:18.715 --> 00:14:20.495 of the financial fixed assets. 279 00:14:20.495 --> 00:14:24.455 Because the financial fixed assets show our equity stake in 280 00:14:24.455 --> 00:14:28.295 the target, the revaluation amount is going to be simply 281 00:14:28.825 --> 00:14:32.895 40% of the increase in the retain earnings 282 00:14:33.045 --> 00:14:35.575 that we can read in the balance sheet of the target. 283 00:14:36.235 --> 00:14:38.375 The retain earnings are incremented by 20. 284 00:14:38.755 --> 00:14:41.695 We hold 40% of the target. 285 00:14:42.115 --> 00:14:44.415 We hold 40% of the retain earnings, 286 00:14:44.995 --> 00:14:49.095 and 40% of 20 is eight, which is a difference. 287 00:14:50.235 --> 00:14:52.045 Now, let's go back to the asset side 288 00:14:52.045 --> 00:14:53.605 of the balance sheet of the investor. 289 00:14:54.075 --> 00:14:57.525 Nothing has changed except the financial fixed assets 290 00:14:57.715 --> 00:14:59.405 because I decided to 291 00:15:00.245 --> 00:15:02.685 reevaluate the equity stake in the target, 292 00:15:03.425 --> 00:15:07.165 and then you understand that the 120 is not unchanged. 293 00:15:07.165 --> 00:15:08.885 It's incremented by eight, 294 00:15:09.265 --> 00:15:12.285 and it is turned into 128. 295 00:15:13.145 --> 00:15:15.725 Now, everything else being equal, you understand 296 00:15:15.725 --> 00:15:16.765 that the bottom line, 297 00:15:16.785 --> 00:15:21.165 the total asset is now 1,926, 298 00:15:21.345 --> 00:15:23.965 and the good news is that it perfectly matches 299 00:15:24.195 --> 00:15:26.085 with equity and liabilities. 300 00:15:27.065 --> 00:15:29.925 Now, obviously you could argue that it is just 301 00:15:29.995 --> 00:15:32.525 between quotes, a kind of accounting tip. 302 00:15:33.065 --> 00:15:36.805 The objective is that the assets are matching ways, equity 303 00:15:36.985 --> 00:15:41.605 and liabilities, but it's a little bit more than a tip. 304 00:15:42.155 --> 00:15:43.285 It's an information. 305 00:15:44.305 --> 00:15:47.205 You understand that we found a clever way 306 00:15:47.265 --> 00:15:48.405 to restore the balance, 307 00:15:48.745 --> 00:15:51.525 but we have also improved the information which is 308 00:15:52.125 --> 00:15:54.885 provided to the stakeholders and to the shareholders. 309 00:15:55.625 --> 00:15:56.925 You remember that we have 310 00:15:56.925 --> 00:16:00.365 to provide some relevant information on the investment. 311 00:16:01.185 --> 00:16:04.205 Now we provide a relevant information on the evolution 312 00:16:04.225 --> 00:16:05.605 of equity stake. 313 00:16:06.225 --> 00:16:08.965 The equity stake is investors' implication. 314 00:16:09.465 --> 00:16:13.725 We have incremented our implication in the target 315 00:16:14.265 --> 00:16:16.605 by the amount of retained earnings. 316 00:16:17.465 --> 00:16:20.045 We have accepted as an investor 317 00:16:20.155 --> 00:16:22.605 that the earnings are incremented by 20 318 00:16:22.825 --> 00:16:27.365 and our implication is added by 40% of 20. 319 00:16:28.025 --> 00:16:31.805 So we have improved information, which is related 320 00:16:31.955 --> 00:16:34.725 with the equity stake in the target. 321 00:16:35.765 --> 00:16:38.905 Of course, it's an information which is limited to equity, 322 00:16:39.205 --> 00:16:40.905 but quite interesting. 323 00:16:42.095 --> 00:16:45.025 This is name the equity method. 324 00:16:45.135 --> 00:16:49.585 Because this method provides information on the equity 325 00:16:49.765 --> 00:16:52.625 of the target, you probably notice 326 00:16:52.695 --> 00:16:54.825 that we have reevaluated an asset. 327 00:16:55.325 --> 00:16:58.345 It happens at companies sometimes reevaluate assets, 328 00:16:58.605 --> 00:17:01.905 for example, a premise, but if you reevaluate a premise, 329 00:17:02.005 --> 00:17:03.145 you show capital gain, 330 00:17:03.365 --> 00:17:06.625 and if you show capital gain under some circumstances, 331 00:17:07.335 --> 00:17:09.745 most circumstances you are going to pay taxes. 332 00:17:10.565 --> 00:17:14.385 But here in that case, we are reevaluating not an asset. 333 00:17:14.485 --> 00:17:16.225 We are reevaluating an investment. 334 00:17:17.335 --> 00:17:19.305 It's one of the very rare cases 335 00:17:19.845 --> 00:17:23.145 of a non-taxable reevaluation of assets. 336 00:17:23.755 --> 00:17:26.705 Let's conclude on this second method with a few comments. 337 00:17:28.005 --> 00:17:29.785 The asset side of the balance sheet 338 00:17:30.665 --> 00:17:33.865 recognizes the investment, the finance of fixed asset 339 00:17:34.205 --> 00:17:37.425 and it's financing because it was financed by cash. 340 00:17:38.045 --> 00:17:40.985 Now, as it is a significant investment, we have 341 00:17:40.985 --> 00:17:45.785 to show some information on performance and value creation 342 00:17:46.485 --> 00:17:49.925 and not only again, the immediate return, 343 00:17:50.135 --> 00:17:52.245 which is the dividend you receive from the target. 344 00:17:53.265 --> 00:17:56.325 The day you do that, you show some additional 345 00:17:56.925 --> 00:17:58.805 earnings on the equity and liabilities side, 346 00:17:59.425 --> 00:18:01.885 and the cash is only incremented by the dividends, 347 00:18:01.885 --> 00:18:04.565 and you create an imbalance between assets 348 00:18:05.145 --> 00:18:06.725 and equity and liabilities. 349 00:18:07.585 --> 00:18:09.045 You know that we, in finance 350 00:18:09.145 --> 00:18:12.125 and accounting, we enjoy very much when the balance sheet is 351 00:18:12.125 --> 00:18:15.605 balancing, so we found a way to restore the balance 352 00:18:15.605 --> 00:18:18.165 between assets on the one hand, equity 353 00:18:18.185 --> 00:18:19.645 and Lilia on the other hand, 354 00:18:20.145 --> 00:18:22.525 but it's not just a matter of restoring balance 355 00:18:22.545 --> 00:18:23.565 of the balance sheet, 356 00:18:23.995 --> 00:18:26.805 it's also about improving the information. 357 00:18:27.225 --> 00:18:30.245 And again, the information is about the implication 358 00:18:30.745 --> 00:18:33.845 of the investor in the development of the target. 359 00:18:34.825 --> 00:18:37.005 Retain earnings is about financing growth. 360 00:18:37.425 --> 00:18:39.565 Retain earnings is about investing In the future. 361 00:18:39.745 --> 00:18:41.445 We have shown our contribution 362 00:18:41.465 --> 00:18:43.325 to the development of the target. 363 00:18:44.225 --> 00:18:46.165 You remember that in the first method 364 00:18:46.825 --> 00:18:50.365 we were holding on LE 10% just a financial investment. 365 00:18:51.265 --> 00:18:54.445 Now it's about 40% a significant industrial 366 00:18:54.905 --> 00:18:55.925 and business investment. 367 00:18:56.865 --> 00:19:00.645 Now, if you really want to control the company in order 368 00:19:00.665 --> 00:19:02.045 to fully decide 369 00:19:02.265 --> 00:19:05.085 and profit from the development of the target, 370 00:19:05.865 --> 00:19:09.765 decide on the strategy, decide the operational decisions, 371 00:19:10.355 --> 00:19:11.885 then you need to control the company. 372 00:19:12.785 --> 00:19:14.565 The first occurrence we are now going 373 00:19:14.565 --> 00:19:16.925 to analyze on a financial statement point 374 00:19:16.925 --> 00:19:21.245 of view is the case of her company, which is 100% control. 375 00:19:21.625 --> 00:19:25.325 So it's a fully owned subsidiary with plenty 376 00:19:25.585 --> 00:19:29.365 of impact on the accounting and on the consolidation.