When do you switch from the equity method to the acquisition method for intercorporate investments?

Great question — this is one of the most frequently tested areas in CFA Level II FRA. Let me walk through the framework and then a worked example.

Ownership Thresholds

These thresholds are guidelines, not rigid cutoffs. An investor with 18% could still use the equity method if they have board representation.

What Changes When You Consolidate

Suppose Hargrove Industries owns 35% of Pelton Technologies and accounts for it under the equity method. Hargrove's balance sheet shows a single line item — "Investment in Pelton" — initially recorded at cost and adjusted each period for Hargrove's share of Pelton's net income minus dividends received.

Now Hargrove acquires an additional 25%, bringing ownership to 60%. At this point, Hargrove gains control and must switch to full consolidation under the acquisition method.

Here's what happens on the transition date:

1. Remeasure the previously held 35% stake to fair value. If the equity-method carrying value was $42 million but fair value is $49 million, Hargrove recognizes a $7 million gain in the income statement.

1. Determine total consideration. The 25% incremental purchase costs $38 million in cash, plus the remeasured 35% at $49 million = $87 million total.

1. Identify and measure Pelton's net assets at fair value. Suppose Pelton's identifiable net assets have a fair value of $130 million. Hargrove's 60% share = $78 million.

1. Calculate goodwill. Total consideration ($87M) minus Hargrove's share of fair value of net assets ($78M) = $9 million goodwill.

1. Consolidate. Hargrove now adds 100% of Pelton's assets and liabilities to its own balance sheet, with a noncontrolling interest (NCI) of 40%.

Common Exam Traps

• Forgetting the remeasurement gain on the previously held interest — this is a one-time income statement boost that candidates often miss.
• Using book value instead of fair value for net assets on the acquisition date.
• Confusing NCI measurement: Under IFRS, you can measure NCI at either fair value (full goodwill) or proportionate share of net assets (partial goodwill). Under US GAAP, full goodwill is required.

For a comprehensive walkthrough of every intercorporate investment scenario with practice problems, explore our CFA Level II course on AcadiFi.