Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
CFA Level I Updated
When must a company recognize a provision under IAS 37, and how is the provision measured?
Under IAS 37, a provision is recognized when three criteria are all met: a present obligation exists from a past event, an outflow of economic benefits is probable (>50% under IFRS), and a reliable estimate can be made. A key GAAP vs. IFRS difference is the probability threshold — IFRS 'probable' means more likely than not (>50%), while US GAAP 'probable' implies a higher ~70-80% likelihood.
What are the key accounting differences between defined contribution and defined benefit pension plans?
Defined contribution plan accounting is simple: pension expense equals the employer contribution, and no pension asset or liability appears on the balance sheet. Defined benefit plans are far more complex, requiring actuarial estimation of future obligations, and the balance sheet shows the funded status (plan assets minus projected benefit obligation).
What happens to borrowing cost capitalization when construction of a qualifying asset is suspended for an extended period?
Under IAS 23, borrowing cost capitalization must be suspended during extended periods when active development of a qualifying asset is interrupted. However, capitalization continues if technical/administrative work is ongoing or if the delay is a normal seasonal interruption inherent to the construction process.
How are government grants accounted for under IAS 20, and what is the difference between the income approach and the capital approach?
IAS 20 allows two methods for government grants related to assets: the deferred income approach (recording the grant as a liability amortized over the asset's life) and the capital approach (netting the grant against the asset's cost). Both produce the same net income effect, but differ in balance sheet presentation.
How does the revaluation surplus for land and buildings work under IFRS, and what goes to OCI vs. profit or loss?
Under IAS 16's revaluation model, increases in fair value of land and buildings go to OCI as a revaluation surplus, unless they reverse a prior P&L impairment loss. Decreases are first charged against any existing revaluation surplus in OCI, with any excess recognized as a loss in profit or loss.
What are real options in capital budgeting, and how does project sequencing create value?
Real options capture the value of managerial flexibility to delay, expand, contract, or abandon projects. Project sequencing creates value by staging investments and creating options to continue or quit based on new information.
What are the mandatory composite construction rules under GIPS, and why do composites matter?
GIPS composites must include all actual, discretionary, fee-paying portfolios that follow a similar strategy. Firms cannot cherry-pick portfolios based on performance, must define composites before the reporting period, and must keep terminated portfolios in historical records.
How do futures margin accounts and daily settlement (mark-to-market) actually work?
Futures margin accounts work through daily mark-to-market settlement. When your account falls below the maintenance margin, you must deposit enough variation margin to restore the account to the initial margin level.
When should I use geometric mean instead of arithmetic mean for investment returns?
This is one of the most frequently tested distinctions in CFA Level I quant. Use arithmetic mean for forecasting a single future period's return, and geometric mean for measuring actual compound growth over multiple periods.
Why does YTM assume coupon reinvestment at the same rate, and when does this assumption fail?
YTM assumes all coupons are reinvested at the YTM rate for the bond's remaining life. When rates change after purchase, reinvestment income differs and realized return deviates from YTM. Zero-coupon bonds eliminate reinvestment risk entirely.
What are dark pools and how does market fragmentation affect equity trading?
Dark pools are private trading venues where orders are matched without publicly displaying quotes before execution. They contrast with lit exchanges where the order book is visible. Institutions use them to execute large block orders without signaling intent to the market.
What is the difference between the completed contract method and the percentage-of-completion method for long-term contracts?
These two methods handle long-term contract revenue very differently. Percentage-of-completion recognizes revenue proportionally as work is performed, while completed contract waits until the project is fully finished. The choice has major implications for income smoothing, balance sheet presentation, and tax timing.
What are the components of the balance of payments current account and why does it matter for currency analysis?
The current account records trade in goods, services, primary income (investment returns), and secondary income (transfers). Persistent deficits signal that a country is spending more abroad than it earns, requiring offsetting capital inflows.
How do you create synthetic positions using options, and what is put-call parity?
Synthetic positions replicate the payoff of one instrument using a combination of others. Put-call parity (c + PV(X) = p + S) is the equation that makes this possible, allowing you to create synthetic stock, calls, puts, or risk-free bonds.
How does coupon reinvestment risk affect a bond's realized total return?
Coupon reinvestment risk is the risk that the cash flows you receive from a bond (coupons) will be reinvested at a rate different from the yield to maturity (YTM) that was assumed when you purchased the bond.
What is the difference between a market maker and a specialist in equity trading?
Market makers and specialists both provide liquidity, but they operate in different market structures. Market makers compete in dealer/OTC markets like NASDAQ, while specialists (DMMs) are assigned to a single stock on auction exchanges like the NYSE with an obligation to maintain an orderly market.
What are the main categories of alternative investments and why should traditional portfolio managers care?
Alternative investments encompass any asset class outside of traditional publicly traded equities, fixed income, and cash. For CFA Level I, you need to understand five major categories: hedge funds, private equity, real estate, commodities, and infrastructure, plus the role each plays in portfolio construction.
What are the real-world differences between accrual and cash basis accounting, and why does the CFA curriculum focus on accrual?
Accrual accounting records economic events when they occur, regardless of when cash changes hands. Cash basis accounting records transactions only when cash is received or paid. The CFA curriculum emphasizes accrual because it provides a more accurate picture of a company's financial performance over a period.
What's the difference between dirty price and clean price, and why do bond markets quote the clean price but settle at the dirty price?
Clean price strips out accrued interest to make bond prices comparable over time, eliminating the sawtooth pattern caused by interest building up between coupon dates. Markets quote clean prices for comparability but settle at dirty prices (clean + accrued interest) because the buyer must compensate the seller for interest earned.
How does the IPO book-building process actually work, and why is it preferred over a fixed-price offering?
In a book-building IPO, the lead underwriter collects non-binding indications of interest from institutional investors before setting the final offer price. This contrasts with fixed-price offerings where the price is set upfront. Book building wins because it extracts information from investors and reduces underpricing.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 488 CFA Level I community questions plus expert-verified study materials.
Have a Question? Ask Our Experts
Register to ask questions, get expert-verified answers, and connect with fellow certification candidates preparing for CFA, FRM, CIA, CPA, and EA exams.