FRA Orientation and Overview

The second subject I lined up for CFA Level 2 was accounting. lol

Just my personal preferred order, that’s all. lol

I passed Level 1, and accounting turned out to be such a fun subject that I went and did a full set of star-lecturer courses on intermediate accounting and advanced accounting from the CPA world —

studied the whole thing as a hobby, basically. heh

https://blog.naver.com/gdpresent/222444927864

Commemorating finishing intermediate accounting — rest & future plans. Waaa….. https://blog.naver.com/gdpresent/222388956934 I was studying intermediate accounting while cosplaying as a madman… blog.naver.com

https://blog.naver.com/gdpresent/222482151813

Commemorating finishing advanced accounting — rest. Waaa!!!!!!!!!!!!!!!!!!!! It’s over!!!!!!!!!!!!!!!!!!!!!! It’s over!!!!!!!!!!!!!!!!!!It’s over!!!!!!!!!!!!!!!!!!… blog.naver.com

Anyway — turns out accounting is genuinely a pretty fun thing.

OK let’s just get into it! This one’s just a short orientation! heh

So what are we actually going to study in CFA Level 2 accounting?

Chapter 0. Orientation

In Level 2’s FRA, instead of studying a lo~~t of stuff shallowly the way Level 1 did, we cover just 5 big themes, with somewhat more depth.

1. Intercorporate Investments:

Consolidated financial statements / equity method accounting → this is the part where you study subsidiary investment shares (sub-investment shares) / associate investment shares (associate company investment shares), all that stuff.

Look at the financial statements of a semiconductor company or a secondary-battery company — P.P.E (property, plant and equipment) and Intangibles take up a huge chunk. That’s natural, the industry itself is like that.

But IT companies like Naver and Kakao? Not like that at all.

The economically meaningful assets of those companies are things like human capital, know-how — that kind of thing!

But you can’t really put that on a financial statement, can you…

So for these kinds of companies, the cash they pile up from running the business just sits there cleanly and directly as Cash & Cash Equivalents on the B/S, no clutter.

And when they reinvest into new businesses, they’re probably not buying tangible or intangible assets either — so no clutter accumulates from that side either.

When companies like this reinvest, they either buy a company outright through M&A, or they make an equity investment big enough to swing significant influence — apparently.

If you buy a company 100%, you just smash it together using the accounting treatment called the acquisition method. Done.

But what if you bought, like, 80% — not the whole thing? Then it’s not entirely yours, but since you hold more than half the voting rights, in practice you have control. In that case you need to draw up consolidated financial statements.. (subsidiary investment shares)

What if it’s not 80% but more like 50%? You don’t have control, but you’re exercising very, very significant influence — and in those cases, you need to apply equity method accounting.. (associate company investment shares)

That’s the kind of thing this part covers.

Key Words:

i) Investment in financial assets: Not an equity investment made to swing influence — just an investment held for the purpose of exit (measured at Fair Value)

ii) Investment in association: Associate investment shares (Equity Method), significant influence — an investment made to get into decision-making and wield significant influence

iii) Investment in subsidiary: Subsidiary investment shares (consolidation, consolidated accounting treatment (by Acquisition Method)) — an investment made to go beyond significant influence and fully control the thing.

* ii) and iii) don’t need to be measured at Fair Value since exit isn’t the point.

2. Employee Compensation:

The benefits an employee gets from a company go way beyond salary and bonuses — there are a bunch of other pieces, and here we study two of them: retirement pension and stock options.

i) Post-Employment Benefit: Pension (retirement pension)

ii) Share-Based Compensation: Stock Option (stock purchase warrants)

* Actually, share-based compensation isn’t only stock options — if you look at foreign companies, sometimes CEOs get not options (which are a choice) but plain shares outright, just with a 3-year lockup before they can sell… that kind of share-based comp exists too.

(Stock options are kind of out of fashion now.. way fewer companies are doing stock options these days compared to before.. The reason is, lol, back in the day stock options weren’t expensed, so they were getting handed out like candy — and that’s why an accounting standard for expensing stock options was created, and that’s what we’re going to study (don’t worry, we’ll only touch it very lightly.. lol))

Items 1–2 above have never not shown up on the exam. You absolutely have to! study them properly!

3. Multi-national Operations

For example — when a subsidiary is overseas, or when a company you’re consolidating is overseas, certain issues come up..

The account items you study in connection with this are foreign exchange gains and losses, or translation losses on foreign operations..

4. Analysis of Financial Institutions

Banks, securities firms, insurance companies, credit card companies, …

The financial statements of these kinds of companies are a whole different beast, and apparently there aren’t many domestic experts in this area.

Why’s that?! Well, how many domestic financial institutions even are there..

Probably means that even if you become an expert here, there’s not much money in it…

(Is it the same story overseas..? Accounting theories do tend to get built around manufacturing companies after all..)

Apparently this theme got newly added in 2020 on the basis that, hey, for at least the most basic stuff — a CFA should probably know at least a little bit, right..?

The lectures are planned to cover only Banks; the original curriculum also includes insurance companies and securities firms..

5. Quality of Financial Reports

Even though financial statements get filtered and come out only after auditors sign off on them, accounting fraud cases have kept popping up in the US.

So — “at least the analysts should know the minimum signs of accounting fraud…” — apparently that was the premise this theme came in under, that we should at least know this at a bare-minimum level.

Apparently in CPA terms, this corresponds to the content of “auditing.”

Originally written in Korean on my Naver blog (2025-01). Translated to English for gdpark.blog.