Financial Analysis #18 - Intercorporate Investments Flashcards Preview

CFA Level 2 2016 > Financial Analysis #18 - Intercorporate Investments > Flashcards

Flashcards in Financial Analysis #18 - Intercorporate Investments Deck (18)
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1
Q

intercorporate investment categories

A

LOS 18.a

  • classification of intercorporate ownership is based on degree of influence or control
  • % ownership is a guide; strict determinant is degree of control

< 20% 20% to 50%>50%
ownership ownership ownership

passive”“influence”**“control”

investment in investment in Business
Financial AssetsAssociatesCombinations

“shared control” = Joint Venture

2
Q

Evidence of level of ownership interest in an intercoporate investment can be determined by which 5 criteria?

A

LOS 18.a

  1. board of directors representation
  2. involvement in policy making
  3. material intercompany transactions
  4. interchange of managerial personnel
  5. dependence on technology
3
Q

Investment in Financial Assets: classifications

A

LOS 18.a

Investment in financial assets:

  • held-to-maturity
  • held for trading (GAAP);
    fair value through profit or loss (IFRS)
  • available-for-sale
  • designated at fair value
4
Q

Reporting of Financial Assets: Held-to-maturity

A

LOS 18.a,b

Held-to-maturity - debt securities where the company has the intent and ability to hold to maturity.

  • interest income reported on IS
  • Interest Income = coupon +/- amort disc (prem)
  • Initially reported at:
    • cost including transactions costs (GAAP)
    • fair value including transactions costs (IFRS)
  • Carried on the BS at amort cost (not at fair value!)
  • Changes in mkt value NOT recognized unless impaired
  • Reclassification or sale prior to maturity may lead to disallowance of held-to-maturity classification “tainting the portfolio”
5
Q

Reporting of Financial Assets:
Held for trading (GAAP)
Fair value through P&L (IFRS)

A

LOS 18.a,b

Held for trading / Fair value thru P&L - debt and equity securities acquired for the purpose of selling in the near future (less than 90 days).

  • Interest and dividend income reported on IS
  • Interest = coupon +/- amort disc (prem)
  • Carried on the BS at fair value (aka market value)
  • Unrealized gain/loss recognized on IS.

Designated at fair value - firms have the option to report any financial asset/liability at fair value.

6
Q

Reporting of Financial Assets: Available for sale

A

LOS 18.a,b

Available for sale - debt and equity securities that are neither held-to-maturity nor trading securities

  • Interest and dividend income reported on IS
  • Interest = coupon +/- amort disc (prem)
  • Carried on the BS at fair value (aka market value)
  • Unrealized gain/loss (net of tax) recognized directly in Equity (OCI) *see IFRS exception below
  • When sold, realized gain/loss removed from OCI and recognized on IS

*Exception for debt securities under IFRS - only securities G/L recognized in OCI; F/X portion of G/L recognized in IS

7
Q

Summary of Financial Assets Accounting

A

LOS 18.a,b

Balance Sheet Income Statement
Fair Value thru P&L Fair Value (A) Dividends
(held for trading) Interest
Realized G/L
Unrealized G/L

Available for Sale Fair Value (A) Dividends
Unrealized G/L (E) Interest
Realized G/L

Held to Maturity Amortized costs Interest
Realized G/L

8
Q

How is Unrealized G/L computed?

A

LOS 18.b

Debt Securities:

Cum unrealized G/L = Fair Value - amortized cost

Equity Securities:

Cum unrealized G/L = Fair Value - purchase price

d(cum unrealized G/L) = difference in unreal G/L over one period

9
Q

Reclassification Rules for Financial Assets (under IFRS and GAAP)

A

LOS 18.a

From To Unreal’d G/L

Held for trade* Any IS (to extent not realized)

HTM Held for trade* IS

HTM Avail for sale OCI

Avail for sale HTM Amortize out of OCI

Avail for sale Held for trade* Transfer out of OCI

* Prohibitied under IFRS – all transfers at fair value on transfer date

10
Q

IFRS 9 (New Standard)

A

LOS 18.a

Applicable from 1/1/2018–early adoption allowed)

  1. Amortized cost (debt securities only)
    Conditions:

  • business model test (how the asset is managed)
  • cash flow characteristic test (are the payments solely interest and principal)

Business model: must be to collect contractual cash flows

Account trestment: same as for held-to-maturity

11
Q

Investment in Associates

A

LOS 18.a

20-50% ownership; includes joint ventures

Significant influencial ownership

Accounting treatment: Equity method

BS: reported at cost + %earnings - %dividends

IS: %earnings

d(BS investmnt) = %share in co. * (earnings - dividends)
= %share in co. * (earnings - dividends)
= %share in co. * d(retained earnings)

NOTE: dividends received are considered a return OF capital

12
Q

Investment in Associates (treatment of transactions with associates) need a card here

A

LOS 18.a

13
Q

Business Combinations (need more here)

A

LOS 18.a

>50% ownership

Controlling position

Acquisition method

(describe here)

14
Q

Compare Equity method and Aquisition methods (need to add this)

A

LOS 18.a

15
Q

Described and compare partial and full goodwill method (need to add)

A

LOS 18.b

16
Q

Impairment of goodwill (need to add)

A

LOS 18.a

17
Q

Impairment of Goodwill: IFRS vs GAAP (need to add)

A

LOS 18.b

18
Q

Analyze/compare ratios under equity and acquisition methods (need to add)

A

LOS 18.c

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