Financial Statement Analysis: CFA® Level II

It is 10–15% of the 2027 Level II exam. 42 learning outcomes across 6 learning modules.

92 practice questions and 0 formula cards on this topic in the app.

Intercorporate Investments

• Set out how IFRS classifies, measures and requires disclosure of: (1) financial asset investments; (2) associates; (3) joint ventures; (4) business combinations; (5) special purpose entities and variable interest entities
• Set IFRS against US GAAP on how each classifies, measures and discloses financial asset investments, associates, joint ventures and business combinations, as well as special purpose entities and variable interest entities
• Analyse how the choice of accounting method for intercorporate investments changes financial statements and ratios

Employee Compensation: Post-Employment and Share-Based

• Contrast the different forms of pay given to employees
• Explain the effect of share-based compensation on the financial statements
• Explain how a financial statement model projects share-based compensation expense and share count, and how these feed into valuation
• Explain the effect of post-employment benefits on the financial statements
• Explain what to consider about post-employment benefits when modelling and valuing a company

Multinational Operations

• Contrast presentation (reporting), functional and local currencies
• Explain exposure to foreign currency transactions, including how the resulting gains and losses are accounted for and disclosed
• Analyse how exchange rate movements change the translated sales of a subsidiary and of its parent
• Contrast the current rate and temporal methods, assess the effect of each on the parent's income statement and balance sheet, and decide which method fits a given situation
• Work out translation effects and assess how the income statement and balance sheet of a subsidiary are restated in the parent's presentation currency
• Analyse the effects of the current rate and temporal methods on financial statements and ratios
• Analyse how the different ways of translating subsidiaries in hyperinflationary economies change financial statements and ratios
• Explain how operating across countries changes a company's effective tax rate
• Explain how shifts in what drives sales bear on whether sales growth can be sustained
• Analyse the possible impact of currency movements on results, given the countries where a company operates

Analysis of Financial Institutions

• Explain what sets financial institutions apart from other companies
• Explain the main features of how financial institutions are regulated
• Explain the CAMELS approach to bank analysis, which covers capital adequacy, quality of assets, management, earnings, liquidity and sensitivity, with its main ratios and its limitations
• Analyse a bank using its financial statements and other considerations
• Explain further considerations that matter when analysing a bank
• Explain the main ratios and other considerations used when analysing an insurer

Evaluating Quality of Financial Reports

• Show how a conceptual framework is used to judge how reliable and useful a company's financial reporting is
• Explain problems that can undermine the quality of financial reports
• Explain the process for judging how good a company's financial reports are
• Judge how good a company's financial reports are
• Explain the signs that indicate earnings quality
• Explain what is meant by sustainable (persistent) earnings
• Explain why earnings revert to the mean and how accruals change how quickly they do so
• Judge the quality of a company's earnings
• Judge the quality of a company's cash flows
• Explain the signs that indicate balance sheet quality
• Judge the quality of a company's balance sheet
• Explain the signs that indicate cash flow quality
• Set out where information about risk can be found

Integration of Financial Statement Analysis Techniques

• Show how a financial statement analysis framework is applied to a specific problem, question or purpose (for example, valuing equity against comparables, critiquing a credit rating, getting a full view of financial leverage, or assessing the views in management's discussion of results)
• Identify the reporting choices and biases that make companies' financial statements less reliable and harder to compare, and explain how such biases can sway financial decisions
• Assess how good a company's financial figures are and propose adjustments that make them more reliable and comparable with peers, including adjustments for differing accounting standards, methods and assumptions
• Assess the effect on financial statements and ratios of a particular change in accounting standards, methods or assumptions
• Analyse and explain the effect of balance sheet adjustments, normalised earnings and cash flow statement adjustments on a company's financial statements, ratios and overall financial condition