Intercorporate Investments

When one company owns part or all of another, the accounting method decides which revenue, assets and debt appear in the investor's statements, so two economically identical groups can report very different margins, returns and leverage. This module explains how investments in financial assets, associates, joint ventures and subsidiaries are classified and measured, where IFRS and US GAAP differ, including goodwill and special purpose entities, and how to analyse the effect of each method on reported results and ratios. Level II item sets typically ask for goodwill, non-controlling interests, equity-method income and the ratio effects of consolidation.

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What you will learn

1. Classify investments in financial assets, associates, joint ventures and subsidiaries, and explain how each is measured under IFRS, including the equity method.

Classification follows influence: none (financial asset), significant (associate), joint control (JV), control (subsidiary).
IFRS 9 equity investments are at FVPL unless irrevocably designated at FVOCI, with no recycling.
Equity method: cost + share of profit - dividends - depreciation of fair value step-ups.
Goodwill inside an equity-method investment is not amortised; the whole investment is tested for impairment.
Eliminate the investor's share of unrealised profit on upstream and downstream sales.

2. Compare IFRS and US GAAP treatment of intercorporate investments, business combinations, goodwill and special purpose or variable interest entities.

US GAAP: equity securities at fair value through net income; IFRS 9 permits FVOCI without recycling.
Equity-method impairment: IFRS allows reversals; US GAAP does not.
US GAAP requires full goodwill; IFRS allows full or partial goodwill per acquisition.
Goodwill impairment: IFRS uses recoverable amount at CGU level; US GAAP uses reporting-unit fair value, loss capped at goodwill.
US GAAP consolidates VIEs by their primary beneficiary; IFRS 10 applies one control model to all entities.

3. Analyse how the equity method, proportionate consolidation and full consolidation change reported results and financial ratios.

Net income attributable to the parent is the same under all three methods.
Equity method: highest margin and ROA, lowest reported leverage; consolidation: largest revenue, assets and liabilities.
Consolidated equity includes NCI; NCI's share of profit is shown separately.
Full goodwill lowers ROA, ROE and debt-to-equity compared with partial goodwill.
IFRS 18 places equity-method income in the investing category, outside operating profit, from 2027.

Module at a glance

Classify investments by influence: financial asset, associate, joint venture or subsidiary; percentages are only guides.
IFRS 9: debt at amortised cost, FVOCI or FVPL by business model; equity at FVPL unless irrevocably designated FVOCI (no recycling). US GAAP puts equity securities through net income.
Equity method: cost + share of profit - dividends - extra depreciation on fair value step-ups - share of unrealised intercompany profit.
US GAAP requires full goodwill; IFRS allows full or partial goodwill, which changes goodwill, NCI, assets and equity.
Goodwill impairment: IFRS recoverable amount at CGU level; US GAAP reporting-unit fair value, loss capped at goodwill; no reversals.
VIEs are consolidated by the primary beneficiary under US GAAP; IFRS 10 uses one control model.
Equity method shows the highest margin and ROA and lowest leverage; profit attributable to the parent is the same under every method.

This free module has 3 lessons, 14 practice questions with full explanations.

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