Reading 16: Intercorporate Investments

CFA Level II FRA
#1

Hi everyone, Just finished reading R16 - Intercorporate Investments. While wrapping up the reading I came into the following summary:

  • If investor has no significant influence over the company (usually less than 20% ownership), then it is categorized as financial asset. Reported and measured as FVPL, FVOCI, AC.
  • If investor has significant influence over the company but no control (usually between 20% - 50%), then it is categorized as associate / joint venture. Reported and measured using equity method of accounting.
  • If investor has significant influence and control over the company (usually at least 50%), then it is categorized as business combination. Reported and measured using acquisition method of accounting.

Now, through hypothetical examples. If my company has 1% ownership in Amazon, then it is categorized as financial asset. In case of 25% ownership, it is categorized as associate / joint venture. In case 60%, it is categorized as business combination.

Correct me if I am mistaken or miss something.

#2

So you’re not wrong but these aren’t absolute rules. It is possible for me hold below 20% and still have significant influence and above 20% I need not necessarily have influence or control. And due to this possibility, you could expect them to mention in the question if a firm has influence, control or neither.

#3

saurabh, thanks for input.