Title LM01 Intercorporate Investments IFT Notes.pdf ✅

LM01 Intercorporate Investments 2023 Level II Notes © IFT. All rights reserved 1 LM01 Intercorporate Investments 1. Introduction ........................................................................................................................................................ 2 2. Basic Corporate Investment Categories................................................................................................... 2 3. Investments in Financial Assets: IFRS 9 .................................................................................................. 3 3.1 Classification and Measurement......................................................................................................... 3 3.2 Reclassification of Investments .......................................................................................................... 4 4. Investments in Associates and Joint Ventures ...................................................................................... 4 4.1 Equity Method of Accounting: Basic Principles ............................................................................ 4 5. Amortization of Excess Purchase Price, Fair Value Option and Impairment ............................ 6 5.1 Amortization of Excess Purchase Price ........................................................................................... 7 5.2 Fair Value Option ...................................................................................................................................... 8 5.3 Impairment ................................................................................................................................................. 8 6. Transactions with Associates and Disclosure ....................................................................................... 9 6.1 Disclosure .................................................................................................................................................12 6.2 Issues for Analysts ................................................................................................................................12 7. Acquisition Method .......................................................................................................................................12 7.1 Acquisition Method...............................................................................................................................13 7.2 Impact of the Acquisition Method on Financial Statements, Post- Acquisition ............14 8. The Consolidation Process .........................................................................................................................16 9. Financial Statement Presentation ...........................................................................................................21 10. Variable Interest and Special Purpose Entities ...............................................................................21 11. Additional Issues in Business Combinations That Impair Comparability ............................24 Summary ................................................................................................................................................................25 This document should be read in conjunction with the corresponding reading in the 2023 Level II CFA® Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright 2022, CFA Institute. Reproduced and republished with permission from CFA Institute. All rights reserved. Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by IFT. CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFA Institute. Version 1.0
LM01 Intercorporate Investments 2023 Level II Notes © IFT. All rights reserved 2 1. Introduction Intercorporate investments are investments in the debt and equity securities of other companies. The motivations for intercorporate investments can range from diversifying asset base to entering new markets or enhancing profitability. Intercorporate investments can have a significant impact on a company’s financial performance and position. This reading covers the various categories of intercorporate investments and their accounting treatments. 2. Basic Corporate Investment Categories Investments in marketable debt and equity securities can be classified into the following four categories based on the degree of influence and control. 1. Investments in financial assets in which the investor has no significant influence or control over the operations of the investee. 2. Investments in associates in which the investor can exert significant influence (but not control) over the investee. 3. Business combinations, including investments in subsidiaries, in which the investor has control over the investee. 4. Joint ventures where control is shared by two or more entities. The table below summarizes the accounting treatment for these categories under IFRS. Financial Assets Associates Business Combinations Joint Ventures Influence Not significant Significant Controlling Shared control Typical percentage interest Usually < 20% Usually 20% to 50% Usually > 50% or other indications of control Financial reporting Classified as:  Fair value through profit or loss  Fair value through other comprehensive income  Amortized cost Equity method Consolidation IFRS: Equity method Instructor’s Note: The percentage of holding is used only as a guideline. The classification ultimately depends on the degree of influence or control.
LM01 Intercorporate Investments 2023 Level II Notes © IFT. All rights reserved 3 3. Investments in Financial Assets: IFRS 9 Both IASB and FASB developed new standards for financial investments. IFRS 9, which replaces IAS 39, became effective on 1 January 2018. With the new standard there is now a significant convergence between IFRS and US GAAP. The new approach considers the contractual characteristic of cash flows as well as the management of the financial assets. The portfolio approach of the previous standard is no longer appropriate and the terms for available-for-sale and held-to-maturity no longer appears in IFRS 9. The new categories for measurement are: 1. Amortized cost 2. Fair value through profit or loss (FVPL) 3. Fair value through other comprehensive income (FVOCI) IFRS 9 also has a different approach to loan impairment. With the new standard, we move from the incurred loss model to the expected credit loss model. Therefore, we not only consider historical and current information about loan performance, but also consider forward-looking information. 3.1 Classification and Measurement Exhibit 2 from the curriculum illustrates how financial assets will be classified and measured under IFRS 9.