Financial Statement Analysis: Study Session 5
Study Session Materials
New Readings from the 2008 CFA Program
Complete List of CFA Program Readings
Topic Overview
Financial Statement Analysis: Intercorporate Investments
This study session focuses on intercorporate investments. These
investments may receive different accounting treatments depending on the
percentage ownership, amount of control, and other variables related to
the relationship between the company making the investment and the
investee.
An analysis of intercorporate investments is necessary to separate
operating performance from investing performance and to understand the
potential accounting distortions that arise due to the accounting rules
and/or earnings management ploys that may occur. When a company invests
in another company, the accounting treatment depends on the level of
ownership and influence. The analyst must understand the different
accounting rules under the cost, fair market, and equity methods in order
to analyze their comparative effects on a company’s financial performance
so that comparability is achieved with other companies and to improve the
investment decision process. The analyst must also understand the
comparative financial statement effects that occur from the consolidation
or proportionate consolidation of intercorporate investments.
The analyst should understand the purchase and pooling methods of accounting that apply to a company’s merger and acquisition activities. Although the pooling method is no longer available for new acquisitions under U.S. GAAP and IAS, the pooling method remains in effect (under both sets of standards) for pooling acquisitions that were in place before the pooling option was eliminated.
Company mergers and acquisitions are troublesome for analysts because a
company’s business and financial statements may be radically changed
within a short period of time. Consequently, the analyst must know how to
analyze and separate the effects of these transactions from the company’s
ongoing operating results.
In the early 2000s, the accounting rules for off-balance sheet
subsidiaries such as Special Purpose Entities (SPEs) were abused.
Subsequently, the FASB and IASB modified the way that companies must
account for SPEs, now known as Variable Interest Entities (VIEs). As a
result, some entities that were previously accounted for
off-balance-sheet are now shown on the parent company’s financial
statements.
View learning outcome statements (LOS) for reading objectives.
New Readings from the 2008 CFA Program
|
"Variable Interest Entities, Intercompany Debt,
Consolidated Cash Flows, and Other Issues" Ch. 6, Advanced Accounting, Joe B. Hoyle, Thomas F. Schaefer, and Timothy P. Doupnik (McGraw-Hill, 2007) |
View LOS |
Complete List of CFA Program Readings
|
“Analysis of Intercorporate Investments” Ch. 13, pp. 454-490 (including Box 13-4), The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003) |
View LOS | |
|
"Mergers, Acquisitions, and Other Intercorporate
Investments" Ch. 13, Financial Statement Analysis: A Global Perspective, Thomas R. Robinson, Paul Munter, and Julia Grant (Pearson-Prentice Hall, 2004) |
View LOS | |
|
"Variable Interest Entities, Intercompany Debt,
Consolidated Cash Flows, and Other Issues" Ch. 6, Advanced Accounting, Joe B. Hoyle, Thomas F. Schaefer, and Timothy P. Doupnik (McGraw-Hill, 2007) |
View LOS |