IA FSA Intercorporate investments

Under IFRS, how are financial assets classified?

• Amortized cost

• Fair value through other comprehensive income (FVOCI)

• Fair value through profit or loss (FVPL)

What determines the classification of financial assets under IFRS?

The business model for managing the asset and the asset’s cash flow characteristics

How does IFRS disclosure differ for FVPL vs. FVOCI

• FVPL: Gains/losses go to the income statement.

• FVOCI: Gains/losses go to other comprehensive income (OCI) unless reclassified upon disposal

How are financial assets treated under US GAAP compared to IFRS?

Similar classification, though terminology may differ (e.g., available-for-sale under US GAAP ≈ FVOCI under IFRS).

How do FVPL and FVOCI affect ratios differently?

• FVPL impacts net income and thus ROE/ROA.

• FVOCI affects equity but not net income, influencing debt-to-equity

When is an investment classified as an associate under IFRS?

When the investor has significant influence, typically 20–50% ownership

What method is used to account for associates under IFRS and US GAAP?

Equity method in both frameworks

Under the equity method, how is the investment measured?

• Initial recognition at cost

• Adjusted for the investor’s share of net income and dividends received

How does the equity method impact financial statements?

• Investment shown as a single line on the balance sheet

• Share of net income recognized in income statement

• No direct impact on revenue or operating profit

How does the equity method affect financial ratios?

• Lower asset turnover (assets increase, revenue unchanged)

• Higher ROA and ROE if associate is profitable

How are joint ventures classified under IFRS?

As joint arrangements with shared control; typically accounted for using the equity method.

How does US GAAP treat joint ventures?

Also uses the equity method, similar to IFRS.

Do joint ventures affect control-based consolidation?

No, joint control means no full consolidation, only equity method is used

What accounting method is required for business combinations under IFRS and US GAAP?

The acquisition method.

How is the acquisition price allocated in a business combination?

• Fair value of net identifiable assets

• Remainder is goodwill

How is goodwill treated under IFRS?

• Not amortized

• Tested annually for impairment using a one-step test

How is goodwill impairment tested under US GAAP?

Uses a two-step impairment test

2 steps Impairment for US GAAP

• Compare fair value of the reporting unit to its carrying amount

• If fair value < carrying value → Calculate implied goodwill and compare to recorded goodwill
  → Impairment = Difference between recorded and implied goodwill

1 step impairment for IFRS

Compare the recoverable amount (greater of value in use or fair value less costs to sell) of the cash-generating unit (CGU) to its carrying amount.

How are non-controlling interests (NCI) measured under IFRS?

• Fair value (full goodwill)

• Proportionate share of net assets (partial goodwill)

How is NCI measured under US GAAP?

Only fair value (full goodwill) is allowed.

How do business combinations affect financial ratios?

• Increase in assets and liabilities can reduce ROA and increase leverage

• Goodwill increases assets, affecting asset turnover

Under IFRS, when must an SPE be consolidated?

If the investor controls the SPE and is exposed to its risks and benefits.

Who consolidates a VIE under US GAAP?

The primary beneficiary—the party that absorbs the majority of losses or gains.

How do consolidated SPEs/VIEs affect financial statements?

• Increase in total assets and liabilities

• May reduce return ratios (e.g., ROA)

• Impacts transparency and risk analysis

What is the difference between upstream and downstream transactions?

• Upstream: Associate → Investor

• Downstream: Investor → Associate

How are upstream intercompany profits eliminated?

Investor reduces equity income by its share of the associate’s unrealized profit (recorded in associate’s income).

How are downstream intercompany profits eliminated?

Investor removes its own profit (unrealized) from its equity income — the investor absorbs the full adjustment.

How is goodwill treated under the equity method?

Goodwill is included in the investment account and not tested separately for impairment; the entire investment is tested.