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 | Ownership | Influence | Method | |---|---|---| | < 20% | No significant influence | Fair value (FVPL or FVOCI) | | 20%–50% | Significant influence | Equity method | | > 50% | Control | Acquisition (full consolidation) | 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. 2. **Determine total consideration.** The 25% incremental purchase costs $38 million in cash, plus the remeasured 35% at $49 million = **$87 million** total. 3. **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. 4. **Calculate goodwill.** Total consideration ($87M) minus Hargrove's share of fair value of net assets ($78M) = **$9 million goodwill**. 5. **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.