Intercorporate Investments: A Comprehensive Guide for CFA Level 2 Candidates

Why Intercorporate Investments are Important:
Intercorporate investments are a crucial topic in the CFA Level 2 curriculum, particularly in the Financial Statement Analysis section. Understanding how companies invest in and influence each other is essential for analysts to accurately assess the financial health and performance of a company. Intercorporate investments can have significant impacts on a company's financial statements, and candidates must be able to interpret and analyze these investments to make informed decisions.

What are Intercorporate Investments?
Intercorporate investments refer to the ownership stakes that one company holds in another company. These investments can take various forms, such as common stock, preferred stock, or debt securities. The level of ownership and influence that the investing company has over the investee company determines how the investment is classified and accounted for in the financial statements.

How Intercorporate Investments Work:
There are three main types of intercorporate investments:
1. Investments in financial assets: These are passive investments where the investor has no significant influence over the investee. They are reported at fair value on the balance sheet, with changes in fair value recorded in the income statement or other comprehensive income, depending on the classification.
2. Investments in associates: These investments provide the investor with significant influence over the investee, typically with a 20-50% ownership stake. They are accounted for using the equity method, where the investor records its share of the investee's net income and adjusts the carrying value of the investment accordingly.
3. Investments in subsidiaries: These investments give the investor a controlling stake (usually >50%) in the investee. The investee's financial statements are consolidated with the investor's, and non-controlling interests are reported separately.

How to Answer Questions on Intercorporate Investments in an Exam:
1. Identify the type of intercorporate investment based on the ownership percentage and level of influence.
2. Determine the appropriate accounting treatment for the investment (fair value, equity method, or consolidation).
3. Analyze the impact of the investment on the investor's financial statements, including the balance sheet, income statement, and cash flow statement.
4. Consider any additional information provided in the question, such as transaction dates, fair values, or impairment indicators, and incorporate them into your analysis.

Exam Tips: Answering Questions on Intercorporate Investments
- Pay close attention to the ownership percentages and the level of influence the investor has over the investee, as these factors determine the accounting treatment.
- Be familiar with the key differences between the fair value, equity, and consolidation methods, and how they impact the financial statements.
- Watch for triggers that may require a change in accounting treatment, such as an increase or decrease in ownership stake or a loss of significant influence.
- Practice time management and prioritize questions based on their difficulty and point value to maximize your score.