Two companies own identical economic stakes in the same operating business. One reports $4 billion of debt on its balance sheet; the other reports none. Nothing about the economics differs. Only the accounting classification does.
Classification of an intercorporate investment turns on influence and control, not on the ownership percentage alone. The percentage is only a presumption that can be rebutted by facts.
Significant influence can exist below 20%. Evidence includes board representation, participation in policy-making, material transactions between the parties, interchange of managerial personnel, and technological dependency.
TRAP: IFRS counts currently exercisable warrants, call options, and convertibles when assessing significant influence. US GAAP looks only at voting shares outstanding at purchase. A 17% holder with exercisable options can be an associate under IFRS and a financial asset under US GAAP.
IFRS 9 asks two questions of a debt instrument. First, a business model test: are the assets held to collect contractual cash flows? Second, a cash flow characteristic test: are those cash flows solely payments of principal and interest?
Common mistakes
- Adding dividends to income. Dividends reduce the carrying amount; they are never equity income. Counting Example 1's $15,000 as revenue double-counts, since the $30,000 already captures it.
- Amortizing goodwill. Only the portion of excess price assigned to depreciable assets amortizes. In Example 1 that is $90,000 over 10 years, not the full $140,000.
- Testing associate goodwill separately. Goodwill is buried in the single investment line, so the whole investment is impairment-tested, unlike consolidated goodwill.
Bottom line
- Classification ladder: no influence (financial asset), significant influence (associate, 20 to 50%), shared control (joint venture), control (consolidate); percentages are presumptions only
- IFRS 9: debt uses business model plus cash flow tests to reach amortized cost, FVOCI, or FVPL; equity is FVPL or an irrevocable FVOCI election, never amortized cost
- Reclassification: equity never, debt only on a business model change, with no restatement of prior periods
- Equity method: cost plus share of income, minus share of dividends, minus amortization of excess price on depreciable assets; goodwill inside the line and never amortized
Exam shortcut
Read the stem for influence language before you look at the percentage. Board seat, policy participation, or technological dependency at 15% means equity method; a passive 30% stake with no influence means financial asset. Build the equity method balance in one column: cost, plus percentage of income, minus percentage of dividends, minus amortization, minus deferred intercompany profit. The classic distractor omits the amortization or adds dividends back as income.
The full lesson (about 2,653 words, 18 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- intercorporate investments
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