Reading 19-Intercorporate investment

CFA Level II FRA
#1

Hi Do we need to learn Rules regarding reclassification of investment in reading 19 or can we skip the details ?

#2

Skip at your own risk. Need to know reclassification as well as impairment rules and differences.

#3

Yes

First exmaple was based on this. Even tough irfanullah told to skip it i have tried to make small points from scswer for this topic

#4

This is a really important section FYI

#5

if in LOS then fair game else skip

#6

Please explain treatment of Bargain acquisition in this readings

#7

Hi. I wrote something similar on this forum regarding Non-controlling interests, so I will use the same numbers:

Consider the following scenario. Parent Co. buys 100% of the shares in a business which has the following asset and liabilities (stated at fair values):

  • property = 10 - trade receivables = 4 - trade payables = 2

The fair value of the net assets of the newly acquired subsidiary is therefore 12 (10 +4 - 2)

If the purchase price is set at 9 (less than the fair value of the net assets of the subsidiary) the transaction is deemed a BARGAIN PURCHASE and the is reflected in the consolidated financial statements of the group (which now includes the new subsidiary) as:

GROUP ASSETS: property: up by 10 (from the subsidiary) trade receivables: up by 4 (from the subsidiary) cash: down by 9 (the purchase price paid by the group to the subsidiary’s previous owners)

GROUP LIABILITIES: trade payables: up by 2 (from the subsidiary)

Please note that the net change in group assets (10 + 4 - 9 = 5) is NOT equal to the increase in group liabiliities (2). The difference, 3, is the GAIN on the bargain purchase (fair value of net asset acquired less purchase price), which is recognised immediately in the Income Statement and as such affects net profit for the period and ultimately gest transferred to Retained earnings within Equity. So, the 5 net increase in assets is balanced by an increase in liabilities (2) and equity (3).

#8

wow man so Gain= 3 will be recognized and added to equity ?

#9

Yep, gain of 3 gets recognised in the Income Statement, and just like anything that goes throgh income, ultimately ends up increasing Retained Earnings within Equity.

#10

Thans 1 more doubt-

In US GAAP - Is the max impairment loss possible is limited upto Goodwill currently in books

#11

yes, you cannot have a goodwill impairment loss which would be higher than the carrying amount of that goodwill. This is shown nicely in the example on pg 143 in the Curriculum.

#12

Thanks wojtek

Any tips on handling reading 20- Pension accounting yes

#13

it’s probably the toughest reading in LII FRA, so the only piece of advice I can give you is just to start reading and if you stumble upon any problems, don’t suffer in silence, post your doubts on the forum and I’m sure we’ll get there :slight_smile:

#14

Thanks a lot. Also if u can please share soem tips to tackle L2 in 4 months plz do post. It will help us a lot

#15

plz explain q no 3,pg 159 of FRA

#16

What is it about the question/aswer that you don’t get? Please be more precise, so that I can help you.

#17

Wojtek i am facing trouble about value of equity in different methods.

1)is it that equity is less when there is significant interest than vs control ? as this is asked in q no 3

  1. in q no 29 why is minority interest same both as per full goodwill and partial goodwill method ?
#18

Vicky,

  1. Yes, this is generally true: Investing in an associate (significant influence) will not impact equity until the associate starts to generate results (and a share of these results gets included within the holding company’s Income Statement. On the other hand, if control is assumed (we treat the investment as a subsidiary) we get an immediate boost to equity due to the inclusion of non-controlling interest (which is certainly the case with 50% share ownership).

  2. Question 29 is constructed so as to give zero goodwill, hence it does not matter (see answer to question 26).

hope this helps

#19

Wojtek thanks the wording of q no 29 was very tricky. Finally understood goodwill is actually zero. wink.

I guess this chapter will require lots of practise to sink in surprise

#20

CFA institute has really made this reading a lot simple than last year

I found Deferred taxes in L1 a lot tougher than this cheeky