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CFA Level II Exam · Intercorporate Investments

Classification of Intercorporate Investments for CFA Level II

Updated 6 October 2026 · Fact-checked

Intercorporate investments are a company's holdings in other companies. You classify them by the degree of influence: no significant influence (financial asset), significant influence (associate, equity method), joint control (joint venture), or control (subsidiary, consolidation). Ownership of about 20% to 50% is only a guide. Facts decide.

Understand Classification of Intercorporate Investments

When one company buys shares or other interests in another company, the accounting depends on how much say the investor has. More influence means more of the investee's results show up in the investor's statements.

There are four categories. Investments in financial assets give no significant influence, usually below about 20% of voting rights. Investments in associates give significant influence but not control, usually about 20% to 50%. Joint ventures are shared-control arrangements. Business combinations give control, usually above 50%, and create a parent and a subsidiary.

The percentages are presumptions, not rules. Significant influence can exist below 20% if the investor has a board seat, takes part in policy decisions, has material transactions with the investee, swaps managerial staff, or supplies key technology. Control can exist at under 50% through contracts, potential voting rights or a dominant position among scattered holders. Holding over 50% may not mean control if the investee is restricted, for example by a court or government.

Each category maps to a method. Financial assets are measured at fair value or amortised cost. Associates and (under IFRS) joint ventures use the equity method. Subsidiaries are consolidated, with non-controlling interest shown for the part the parent does not own. Joint ventures under US GAAP also use the equity method. Proportionate consolidation for joint ventures is generally not permitted under IFRS, and it is only permitted in limited cases under US GAAP.

For the exam, the skill is reading the vignette for clues about influence, then choosing the method and predicting its effect on net income, assets, equity and ratios.

Key formulas to remember

No significant influence
Ownership below about 20% → financial asset
Presumption only. IFRS 9 governs under IFRS. US GAAP uses fair value through net income for most equity securities, and amortised cost or fair value for debt securities.
Significant influence
About 20% to 50% → associate → equity method
Indicators: board representation, policy participation, material transactions, managerial interchange, technology dependence. Can apply below 20%.
Control
Control (usually above 50%) → subsidiary → consolidation
Control means power over relevant activities, exposure to variable returns and the ability to use power to affect returns. Potential voting rights count if currently exercisable.
Joint control
Contractual sharing of control → joint venture → equity method
IFRS 11 requires the equity method for joint ventures. Joint operations are accounted for by recognising the investor's share of assets, liabilities, revenue and expenses.
Equity method carrying amount
Ending investment = Beginning + share of investee net income − dividends received
Dividends reduce the investment. They are not income.

How to solve Classification of Intercorporate Investments questions

Use this sequence for any classification question in an item set.

  1. 1Find the ownership percentage and the type of interest (voting shares, potential voting rights, contractual rights).
  2. 2Look for influence clues: board seats, policy participation, material transactions, staff exchange, technology dependence.
  3. 3Decide whether the investor controls the investee, using power, variable returns and the link between them. Do not rely on percentage alone.
  4. 4If not control, check whether control is shared by contract. If so, it is a joint venture or joint operation.
  5. 5If not shared control, decide between significant influence (associate) and none (financial asset).
  6. 6Name the accounting method: fair value or amortised cost, equity method, or consolidation.
  7. 7Apply the method to what the question asks: net income, carrying amount, ratios or comparability, and check the standard (IFRS or US GAAP).

Quickest way: Influence ladder

When to use it: When time is short and the vignette gives a percentage plus a few qualitative facts.

  1. Percentage first: under 20%, 20-50%, over 50%.
  2. Scan for one override clue that moves the category up or down.
  3. Map: none → fair value, significant → equity method, control → consolidate, shared control → equity method.
  4. Answer the question asked and eliminate options that use the wrong method.

Common mistakes in Classification of Intercorporate Investments

  • Classifying only by ownership percentage

    The 20% and 50% thresholds are memorised as hard rules.

    Fix: Treat them as presumptions. Check board seats, contracts, potential voting rights and restrictions on the investee.

  • Treating dividends from an equity-method investee as income

    Students carry over the logic from financial assets.

    Fix: Under the equity method, dividends reduce the investment account. Income is the share of investee net income.

  • Confusing a joint venture with a joint operation

    Both involve joint control, so they look alike.

    Fix: A joint venture gives rights to net assets and uses the equity method. A joint operation gives rights to assets and obligations for liabilities, recognised line by line.

  • Applying IFRS 9 categories to a US GAAP question

    The two frameworks use similar names for fair value categories.

    Fix: Read the framework named in the vignette. Under US GAAP, most equity securities go through net income at fair value, while debt securities use amortised cost, fair value through OCI or fair value through net income.

  • Assuming over 50% always means consolidation

    The majority rule is taught as absolute.

    Fix: Check whether the investor truly has power. Legal or regulatory restrictions can remove control.

Worked examples

Example 1

Vignette: Aster Corp owns 18% of the voting shares of Borel Ltd. Aster has appointed two of Borel's seven directors and supplies the key technology Borel uses. No other investor holds more than 10%. Questions: (1) How should Aster classify the investment? (2) Which method applies? (3) Does the 18% figure decide the answer?

Show the solution
  1. Ownership is 18%, below the 20% presumption for significant influence.
  2. Clues: board representation and technology dependence are recognised indicators of significant influence.
  3. Aster does not control Borel: 18% with only two of seven seats and dispersed other holders gives no clear power over relevant activities.
  4. So the investment is an associate, and the equity method applies.
  5. The 18% figure does not decide the answer, because influence indicators override the presumption.

Answer: (1) Investment in an associate. (2) Equity method. (3) No. Facts showing significant influence override the percentage.

Example 2

Vignette: Corvo Inc. buys 30% of Delta Co. for ₹60,00,000 at the start of the year, and has significant influence. During the year Delta reports net income of ₹20,00,000 and pays total dividends of ₹8,00,000. Questions: (1) What method applies? (2) What is Corvo's share of income? (3) What is the carrying amount at year end, ignoring excess purchase price effects?

Show the solution
  1. Significant influence at 30% means an associate, so the equity method applies.
  2. Share of income = 30% × ₹20,00,000 = ₹6,00,000.
  3. Dividends received = 30% × ₹8,00,000 = ₹2,40,000, which reduce the investment.
  4. Ending carrying amount = ₹60,00,000 + ₹6,00,000 − ₹2,40,000 = ₹63,60,000.

Answer: (1) Equity method. (2) ₹6,00,000 recognised in income. (3) ₹63,60,000.

Exam tips

  • Read the vignette for qualitative influence clues before using the percentage. Item sets often hide the deciding fact in a footnote or exhibit.
  • Check whether the question says IFRS or US GAAP before choosing the method for financial assets and joint ventures.
  • Know the effect on ratios: consolidation adds the subsidiary's assets and liabilities in full, while the equity method shows a single line investment.
  • With no penalty for wrong answers, always answer every question and eliminate options with the wrong method first.

Classification of Intercorporate Investments: frequently asked questions

What is the difference between an associate and a subsidiary?

An associate is an investee over which the investor has significant influence but not control, and it is accounted for with the equity method. A subsidiary is controlled by the parent and is consolidated line by line. Non-controlling interest is shown if the parent owns less than 100%.

Is 20% ownership always significant influence?

No. Around 20% to 50% is a presumption only. Significant influence can exist below 20% and may be absent above 20% if facts show the investor cannot take part in policy decisions.

How do IFRS 9 and US GAAP differ for financial asset investments?

Under IFRS 9, classification depends on the business model and cash flow characteristics for debt, and equity is at fair value through profit or loss unless an election for OCI is made. Under US GAAP, most equity securities are at fair value through net income, and debt securities use amortised cost, fair value through OCI or fair value through net income.

Which method applies to joint ventures?

The equity method applies to joint ventures under IFRS. Under US GAAP the equity method is also generally used, with proportionate consolidation allowed only in limited cases.