FRA - Intercorporate investments

Question 1

Intercorporate investments

Answer 1

Investments in other companies. Can be debt or equity investments.

Reasons:

• diversify their asset base
• enter new markets
• obtain competitive advantage
• achieve additional profitability

Question 2

Basic Corporate investments categories

Answer 2

1) Investments in financial assets
2) Investments in Associates
3) Joint Ventures
4) Business Combinations

Question 3

Investments in financial assets

Answer 3

• no significant influence or control, typically < 20% equity stake
• classified as fair value to P/L; fair value to other comprehensive income; amortized cost

Question 4

Investments in Associates

Answer 4

• significant influence but no control, typically 20-50% equity interest

Question 5

Joint Ventures

Answer 5

Control is shared by 2 or more entities

Question 6

Business Combinations (including investments in subsidiaries)

Answer 6

Control, typically > 50% equity interest

Question 7

Amortized cost (Investments in financial assets category)

Answer 7

• only applies to debt
• Business model test: the financial assets are being held to collect contractual cash flows
• Cash flow characteristic test: cash flows are solely principal + interest

Question 8

Fair value through profit or loss (FVPL) [Investments in financial assets category]

Answer 8

all equity, some debt (if the 2 conditions in amortized cost aren’t met or if the asset can be sold, then can elect either FVPL or FVOCI)

Question 9

Fair value through Other Comprehensive Income (FVOCI) [Investments in financial assets category]

Answer 9

all equity, some debt (if the 2 conditions in amortized cost aren’t met or if the asset can be sold, then can elect either FVPL or FVOCI)

Question 10

All financial assets are measured at

Answer 10

fair value

Question 11

All interests and dividends are recognized as

Answer 11

income in P/L

Question 12

Other comprehensive income consists

Answer 12

…of items that have an effect on balance sheet amounts, but the effect isn’t reported on the company’s income statement.

OCI items don’t affect net income

Question 13

Business model test (amortized cost)

Answer 13

debt securities are being held to collect contractual cash flows

Question 14

cash flow characteristic test (amortized cost)

Answer 14

the contractual cash flows are either principal or interest on principal only

Question 15

Remember, fair value is

Answer 15

what someone is willing to pay. Ignore any assumptions of 100% of fair value in question stem

Question 16

Reclassification

Answer 16

Equity -> no reclassifyring

Debt -> can be reclassified only if the business model has changed