Accounting for Investments

CFA Level II FRA
#1

Under IFRS, where an investor owns a significant number (39%) of the voting shares of an investee but has no involvement in policy making and no Board of Directors’ representation, which of the following investment classifications is most appropriate to characterize the situation?

A)

Investment in associates.

B)

Investment in financial assets.

C)

Significant influence.

B is the correct answer but it looks like this contradicts the table I found in my book. Here is the table:

Ownership Degree of Influence Accounting treatment
Less than 20% None HTM, AFS, FV through P&L
(Investments in financial assets)

20%-50% Significant Equity Method
(Investmentin associates)

I was thinking the answer should be investment in associates due to having 39% which is between 20-50. Is this outweighed by the fact that there is no board representation or significant influence any other way?

#2

The criterion is whether you have influence or control over the other company:

  • With no influence, it’s an investment in securities
  • With influence but not control, it’s an investment in an associate: equity method
  • With control, it’s consolidation

The cutoffs of 20% and 50% are guidelines for when influence might occur and when control might occur, respectively, but nothing more. Here, you’re told that there’s no influence (no involvement in policy, no BOD representation), so it’s an investment in financial assets, the percentage of ownership notwithstanding.

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#3

So if say there is an investment in serurities but you own 25% would that still be an investment? Should I just ignore the % owned and focus on control etc…?

#4

Yes.

Unless that’s the only thing on which you have to go, yes.