© CFA Institute. For candidate use only. Not for distribution.
FINANCIAL STATEMENT
ANALYSIS
CFA® Program Curriculum
2025 • LEVEL II • VOLUME 3
,© CFA Institute. For candidate use only. Not for distribution.
©2024 by CFA Institute. All rights reserved. This copyright covers material written
expressly for this volume by the editor/s as well as the compilation itself. It does
not cover the individual selections herein that first appeared elsewhere. Permission
to reprint these has been obtained by CFA Institute for this edition only. Further
reproductions by any means, electronic or mechanical, including photocopying and
recording, or by any information storage or retrieval systems, must be arranged with
the individual copyright holders noted.
CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the
trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the
Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional service.
If legal advice or other expert assistance is required, the services of a competent pro-
fessional should be sought.
All trademarks, service marks, registered trademarks, and registered service marks
are the property of their respective owners and are used herein for identification
purposes only.
ISBN 978-1-961409-23-1 (paper)
ISBN 978-1-961409-34-7 (ebook)
August 2024
, © CFA Institute. For candidate use only. Not for distribution.
CONTENTS
How to Use the CFA Program Curriculum ix
CFA Institute Learning Ecosystem (LES) ix
Designing Your Personal Study Program ix
Errata x
Other Feedback x
Financial Statement Analysis
Learning Module 1 Intercorporate Investments 3
Introduction 4
Basic Corporate Investment Categories 4
Investments In Financial Assets: IFRS 9 6
Classification and Measurement 7
Reclassification of Investments 9
Investments In Associates And Joint Ventures 10
Equity Method of Accounting: Basic Principles 11
Amortization of Excess Purchase Price, Fair Value Option, and Impairment 15
Amortization of Excess Purchase Price 16
Fair Value Option 18
Impairment 19
Transactions with Associates and Disclosure 19
Disclosure 22
Issues for Analysts 23
Acquisition Method 24
Acquisition Method 25
Impact of the Acquisition Method on Financial Statements,
Post-Acquisition 28
The Consolidation Process 30
Business Combination with Less than 100% Acquisition 30
Non-controlling (Minority) Interests: Balance Sheet 31
Non-controlling (Minority) Interests: Income Statement 33
Goodwill Impairment 34
Financial Statement Presentation 36
Variable Interest and Special Purpose Entities 39
Securitization of Assets 41
Additional Issues in Business Combinations That impair Comparability 43
Contingent Assets and Liabilities 43
Contingent Consideration 43
In-Process R&D 44
Restructuring Costs 44
Summary 44
Practice Problems 46
Solutions 58
, © CFA Institute. For candidate use only. Not for distribution.
iv Contents
Learning Module 2 Employee Compensation: Post-Employment and Share-Based 63
Introduction 63
Types of Employee Compensation 65
Share-Based Compensation 68
Financial Reporting for Share-Based Compensation 69
Restricted stock 71
Stock options 73
Share-Based Compensation Tax and Share Count Effects, Note Disclosures 77
Share-Based Compensation and Shares Outstanding 79
Disclosures for Share-Based Compensation 83
Share-Based Compensation and Financial Statement Modeling 84
Forecasting Shares Outstanding with Share-Based Awards 86
Financial Reporting for Post-Employment Benefits 88
Financial Reporting for DC Plans 90
Financial Reporting for DB Plans 91
US GAAP and IFRS Differences in DB Pension Accounting 96
Disclosures for Post-Employment Benefit Plans 97
Financial Modeling and Valuation Considerations for Post-Employment
Benefits 100
Valuation Considerations for DB Plans 100
Practice Problems 102
Solutions 111
Learning Module 3 Multinational Operations 115
Introduction 116
Foreign Currency Transactions 117
Disclosures Related to Foreign Currency Transaction Gains and Losses 124
Translation of Foreign Currency Financial Statements 130
Translation Conceptual Issues 130
Translation Methods 134
Foreign Currency Is the Functional Currency 136
Parent’s Presentation Currency Is the Functional Currency 137
Translation of Retained Earnings 139
Highly Inflationary Economies 140
Illustration of Translation Methods 143
Translation Analytical Issues 147
Translation in an Hyperinflationary Economy 157
Using Both Translation Methods 162
Disclosures Related to Translation Methods 163
Multinational Operations and a Company's Effective Tax Rate 169
Additional Disclosures on the Effects of Foreign Currency 171
Disclosures Related to Sales Growth 171
Disclosures Related to Major Sources of Foreign Exchange Risk 174
Summary 176
Practice Problems 179
Solutions 193
FINANCIAL STATEMENT
ANALYSIS
CFA® Program Curriculum
2025 • LEVEL II • VOLUME 3
,© CFA Institute. For candidate use only. Not for distribution.
©2024 by CFA Institute. All rights reserved. This copyright covers material written
expressly for this volume by the editor/s as well as the compilation itself. It does
not cover the individual selections herein that first appeared elsewhere. Permission
to reprint these has been obtained by CFA Institute for this edition only. Further
reproductions by any means, electronic or mechanical, including photocopying and
recording, or by any information storage or retrieval systems, must be arranged with
the individual copyright holders noted.
CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the
trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the
Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional service.
If legal advice or other expert assistance is required, the services of a competent pro-
fessional should be sought.
All trademarks, service marks, registered trademarks, and registered service marks
are the property of their respective owners and are used herein for identification
purposes only.
ISBN 978-1-961409-23-1 (paper)
ISBN 978-1-961409-34-7 (ebook)
August 2024
, © CFA Institute. For candidate use only. Not for distribution.
CONTENTS
How to Use the CFA Program Curriculum ix
CFA Institute Learning Ecosystem (LES) ix
Designing Your Personal Study Program ix
Errata x
Other Feedback x
Financial Statement Analysis
Learning Module 1 Intercorporate Investments 3
Introduction 4
Basic Corporate Investment Categories 4
Investments In Financial Assets: IFRS 9 6
Classification and Measurement 7
Reclassification of Investments 9
Investments In Associates And Joint Ventures 10
Equity Method of Accounting: Basic Principles 11
Amortization of Excess Purchase Price, Fair Value Option, and Impairment 15
Amortization of Excess Purchase Price 16
Fair Value Option 18
Impairment 19
Transactions with Associates and Disclosure 19
Disclosure 22
Issues for Analysts 23
Acquisition Method 24
Acquisition Method 25
Impact of the Acquisition Method on Financial Statements,
Post-Acquisition 28
The Consolidation Process 30
Business Combination with Less than 100% Acquisition 30
Non-controlling (Minority) Interests: Balance Sheet 31
Non-controlling (Minority) Interests: Income Statement 33
Goodwill Impairment 34
Financial Statement Presentation 36
Variable Interest and Special Purpose Entities 39
Securitization of Assets 41
Additional Issues in Business Combinations That impair Comparability 43
Contingent Assets and Liabilities 43
Contingent Consideration 43
In-Process R&D 44
Restructuring Costs 44
Summary 44
Practice Problems 46
Solutions 58
, © CFA Institute. For candidate use only. Not for distribution.
iv Contents
Learning Module 2 Employee Compensation: Post-Employment and Share-Based 63
Introduction 63
Types of Employee Compensation 65
Share-Based Compensation 68
Financial Reporting for Share-Based Compensation 69
Restricted stock 71
Stock options 73
Share-Based Compensation Tax and Share Count Effects, Note Disclosures 77
Share-Based Compensation and Shares Outstanding 79
Disclosures for Share-Based Compensation 83
Share-Based Compensation and Financial Statement Modeling 84
Forecasting Shares Outstanding with Share-Based Awards 86
Financial Reporting for Post-Employment Benefits 88
Financial Reporting for DC Plans 90
Financial Reporting for DB Plans 91
US GAAP and IFRS Differences in DB Pension Accounting 96
Disclosures for Post-Employment Benefit Plans 97
Financial Modeling and Valuation Considerations for Post-Employment
Benefits 100
Valuation Considerations for DB Plans 100
Practice Problems 102
Solutions 111
Learning Module 3 Multinational Operations 115
Introduction 116
Foreign Currency Transactions 117
Disclosures Related to Foreign Currency Transaction Gains and Losses 124
Translation of Foreign Currency Financial Statements 130
Translation Conceptual Issues 130
Translation Methods 134
Foreign Currency Is the Functional Currency 136
Parent’s Presentation Currency Is the Functional Currency 137
Translation of Retained Earnings 139
Highly Inflationary Economies 140
Illustration of Translation Methods 143
Translation Analytical Issues 147
Translation in an Hyperinflationary Economy 157
Using Both Translation Methods 162
Disclosures Related to Translation Methods 163
Multinational Operations and a Company's Effective Tax Rate 169
Additional Disclosures on the Effects of Foreign Currency 171
Disclosures Related to Sales Growth 171
Disclosures Related to Major Sources of Foreign Exchange Risk 174
Summary 176
Practice Problems 179
Solutions 193
