Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
CFA Updated
What is yield to worst, and why is it the most conservative yield measure for callable bonds?
Yield to worst is the minimum yield across all possible call dates and maturity, representing the most conservative return estimate for callable bonds. For premium bonds, YTW is typically the yield to the nearest call date.
How do clean surplus violations affect the residual income model, and how should I adjust?
Clean surplus violations occur when items bypass net income and go directly to Other Comprehensive Income, distorting the residual income model. Common violations include foreign currency translation adjustments, unrealized securities gains, and pension adjustments.
What is the real difference between GDRs and ADRs, and when would a company choose one over the other?
Both ADRs and GDRs are negotiable certificates representing shares in a foreign company, but they differ in where they trade, how they're regulated, and which investors they target. ADRs trade on US exchanges under SEC oversight, while GDRs typically list in London or Luxembourg with lighter regulation.
What is an onerous contract under IAS 37, and how is the provision calculated when a company is locked into a loss-making agreement?
An onerous contract under IAS 37 exists when the unavoidable costs of fulfilling a contract exceed the economic benefits expected. The unavoidable cost is the lower of the cost to fulfill or the penalty to exit. A provision for the net loss is recognized immediately when the contract becomes onerous.
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.
How is an arbitrage-free binomial interest rate tree calibrated to match market prices?
An arbitrage-free binomial tree is calibrated by adjusting interest rates at each node so that the tree correctly prices all on-the-run benchmark bonds at par. The process uses trial-and-error with a volatility assumption relating up and down rates.
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.
How sensitive is the H-model to changes in the initial high-growth rate assumption?
The H-model approximates a linear decline in growth rate from an initial high rate to a sustainable rate. The growth premium is linear in the spread between high and stable growth, making the model moderately sensitive to the initial growth assumption.
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.
How are joint ventures accounted for under IFRS 11 using the equity method?
Under IFRS 11, joint ventures use the equity method with several CFA Level II nuances: excess purchase price must be allocated to identifiable assets (amortized) and goodwill (not amortized), unrealized intercompany profits are eliminated proportionally, and the entire investment is tested for impairment as a single asset. Losses cannot reduce the investment below zero unless the investor has additional obligations.
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.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 2,557 CFA 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.