SS6 – FRA Intercorporate Investments


The candidate should be able to:

a describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities;

b distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities;

c analyze how different methods used to account for intercorporate investments affect financial statements and ratios.


Good video link 

A company’s investment in another company can be categorized as

a.Investment in financial assets – This is generally when investment is <20% and don’t have influence to make decisions.

b.Equity investment in associates – This is typically 20-50% investment and has significant influence. (Equity method is used for accounting).

c.Investment in subsidiaries – This is greater than 50% investment and has control on the invested firm. (Consolidation method is used for accounting)

Now, the investment in financial assets can be further categorized as Held to maturity (HTM), Available for Sale(AFS) and Trading or Designated at FV.

Balance sheet and Income statement classifications for the above

Financial Statement                       HTM                                   AFS                                   Trading

Balance sheet                Amortized cost  ,                 Market or FV           ,                  Market or FV

Income Statement         Realized gain or Amortized gain,   Realized gain,                      Realized gain + Unrealized gain

OCI                                N/A                                            Unrealized gain                               N/A

Difference between IFRS and USGaap for AFS (Equity method)

Under IFRS, the foreign exchange gains/loss goto Income statement where as this goes to OCI under USGAAP.

All other unrealized income goes to OCI in both IFRS and USGAAP.

Equity method: Video here 

Company A invests in Company B shares.

While creating financial statements for Company A, the equity portion of B should be listed in the Equity portion of BS for Company A. At the end of the year, if Company B has a profit, that proportion of profit should be added as a profit to A’s financial statement as well. Also on BS of A, the increased retained earning ( net income ) should be added to both equity side and shares inventory on the asset side. Any dividend coming out of this profit should goto the cash portion of A’s BS.


YTM, Spot Rates and Forward rates

For a quick refresher on the YTM. Spot rates and forward rates refer to the below videos

CFA Level I Yield Measures Spot and Forward Rates

CFA Level I Yield Measures Spot and Forward Rates

Semi annual BEY of 10% is better than annual yield of 10%. Look at part 2 of the above video series for explanation.

ETHICS – Code and Standards (Reading 1a)

Reading 1a Objectives (Source)

The candidate should be able to:

a. describe the six components of the Code of Ethics and the seven Standards of Professional Conduct;

b explain the ethical responsibilities required of CFA Institute members and candidates in the CFA Program by the Code and Standards.

6 Components of Code of Ethics

Act with DRICE ( Diligence, Respect, Integrity, Competence, Ethical)

Place integrity of investment profession and interests of clients above personal interests.

Reasonable care related to independent due diligence analysis / research for customer investment decisions and with objectivity.

Practice and encourage others to practice in professional and ethical manner  to maintain the credibility and integrity of the profession.

Promote the integrity of rules governing capital markets

Maintain and improve both your and other’s professional competence

7 Standards of Professional Conduct (PIDDICR)

Professionalism – KIMM

Knowledge of Law, Independence and Objectivity, Misrepresentation, Misconduct.

Integrity of Capital Markets – MM

Market Non public information, Market manipulation

Duties to Clients – LFSPP

Loyalty Prudence and Care, Fair dealing, Suitability, Performance presentation, Preservation of Confidentiality.

Duties to Employers – LAR

Loyalty, Additional Compensation Arrangement, Responsibilities of Supervisors.

Investment Analysis Recommendations and Actions – DCR

Diligence and Reasonable basis, Communications with Clients and Prospective Clients, Record Retention ( recommended 7 years )

Conflicts of Interest – DPR

Disclosure of Conflicts, Priority of Transactions, Referral fees.

Responsibilities as a CFA Member  – CR

Conduct as Members and Candidates in the CFA Program, Reference to CFA Institute Designation and Program.