Analyst adjustment for Investment

CFA Level I FRA
#1

Hello everyone,

Please help me to understand why mangement cant do classification of investment accounted for under the equity method and investment in consolidated subsidiaries?

Thanks

#2

The classification depends on whether the acquiring company has control or merely influence over the acquired company. At the threshold – near 50% ownership – management may have some say, but far from the threshold there’s not much they can do.

#3

The thread title and content are a little confusing.

#4

Hi,

I came across this query in volume -3 reading 35 under the section adjustment done by analyst on investment during ratio analysis between two companies.

#5

Hello Magician,

Ok. Well to make my question more clear I came across this statment in CFA-1 volume -3 reading 35 section adjustemnt in investment by analyst while comparing two companies.

Two classification were given

  1. Available for trade where unrealized gain or loss recorded in Income Statement as per the diiference in market value of securities available of trade.
  2. Held for maturity where such gains are shown in comprehensive income after net income in Income statement.

So whatever be the rights in regards of acquiring conquering but being an investor company at least classify them as per these two catagories.

Thanks

#6

First, the designations are available-for-_ sale _ (not trade) and held-_ to _-maturity (not for maturity).

Second, on available-for-sale securities, unrealized gains and losses do not go through the income statement, they are part of other comprehensive income.

Third, for held-to-maturity securities, there are no unrealized gains or losses recorded; they are listed at amortized purchase price, not at fair market value.

Fourth, these two designations are for _ investments in securities _; not ownership using the equity method, and not consolidation.

Finally, if one company designates their bond investments as available-for-sale and another designates the same (or similar) investments as held-to-maturity, the analyst should determine whether these designations represent each company’s true intentions; if not, he should change them to the appropriate designations and account for them properly under the new designation, adjusting the income statement and balance sheet accordingly.

#7

Thanks for the clear explanation.

One more doubt how an analyst determine it via looking at financial reports.

I mean in footnotes contain information which we cant make part of reports but I doubt is such type of underblanket information can be retrieved?

Thanks

#8

You’ll forgive me, but I have no idea what this means.

#9

Any information that is disclosed in the footnotes is viable to use in your analysis and research report. Simillarly, any accounting convention used to measure the book values of items on the balance sheet should be disclosed on the financial statements.

Hope this answers your question.