Intercorporate investments refer to the financial transactions between companies, through various debt and equity instruments, to diversify asset portfolios, enter new markets, obtain competitive advantages, etc. There are mainly four forms: financial assets, associates, business combinations, and joint ventures. Their accounting treatments are quite different depending on the level of influence or control. It is important to understand the differences in order to analyze financial statements properly.
financial assets mean no significant influence, accounted for at fair value
Financial assets investments mean the investor has no significant influence or control over the investee. They are accounted for at fair value through profit/loss, fair value through other comprehensive income, or amortized cost, depending on the business model and contractual cash flow characteristics.
associates mean significant influence, accounted for using equity method
Associates investments mean the investor has significant influence over the investee, with ownership between 20-50% typically. They are accounted for using the equity method, which is like a one-line consolidation showing the investor’s share of the investee’s net assets.
business combinations mean control, requiring consolidation
Business combinations refer to controlling interest investments where the investor obtains control over the investee, typically with over 50% ownership. The accounts of the parent and subsidiary need to be consolidated, eliminating the intercorporate investments.
joint ventures mean joint control, accounted for using equity method
Joint ventures are investments where two or more investors share joint control over an investee, typically close to 50/50 ownership split. They are accounted for using the equity method under IFRS.
In summary, intercorporate investments have very different accounting treatments depending on the level of influence or control the investor has over the investee company. Proper analysis requires understanding these differences.