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.


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