Question: The 2006 sale of BlackRock, Inc. by PNC Financial Services Group to Merrill Lynch PNC could generate $3.2 billion in unrealized pretax gains which owned roughly 34% of BlackRock after the deal, must account for the holding based on BlackRock's book value, not its market value. This rule applies regardless of whether PNC consolidates the holding on its balance sheet, which it does now as a 70% owner, or uses the equity method of accounting, which will be the case after the deal closes. A new rule by FASB, however, allows PNC to choose to value its holding based on market value when using the equity method. If PNC chooses this valuation method, it will see a pretax gain of $3.2 billion based on BlackRock's current share price. However, using this method presents bookkeeping headaches as the value of the holding would have to be adjusted regularly.
1. What consequences could PNC face by adjusting the value of its holding in BlackRock on a quarterly basis?
2. How would you recommend PNC account for its holding? Discuss advantages and disadvantages of consolidating the financial statements versus reporting the investment using the equity method.