CFA Level II item sets and practice questions

Ingrid Solberg is an equity analyst at Nordlys Capital, an Oslo-based investment manager that runs concentrated portfolios of Nordic industrial companies. Solberg covers Halvorsen Industrial, a listed manufacturer of hydraulic systems for offshore vessels. Halvorsen Industrial prepares its financial statements under IFRS and reports in euros. Its financial year ends on 31 December.

On 1 January 2026, Halvorsen Industrial paid €48.0 million in cash for 30% of the ordinary shares of Brekke Marine, a privately held designer of winch-control software. Before the transaction, Halvorsen Industrial held no shares in Brekke Marine. The remaining 70% of Brekke Marine is owned by its two founders, who continue to run the company day to day. Under the shareholder agreement, Halvorsen Industrial appoints two of the seven members of the Brekke Marine board and has the right to be consulted on the annual budget, but it cannot direct Brekke Marine's operating or financing decisions on its own. Halvorsen Industrial's management has concluded that it has significant influence but not control or joint control, and it accounts for the investment as an associate using the equity method.

At the acquisition date, the book value of Brekke Marine's identifiable net assets was €120.0 million. A valuation commissioned by Halvorsen Industrial found that the fair value of Brekke Marine's capitalised software exceeded its book value by €20.0 million. The software has a remaining useful life of ten years and is amortised on a straight-line basis with no residual value. The fair values of all other identifiable assets and liabilities were equal to their book values. Any excess of the purchase price over Halvorsen Industrial's share of the fair value of identifiable net assets is treated as goodwill, which is not amortised. Solberg confirms from the notes that no impairment of the investment was recognised in 2026.

Exhibit 1 summarises the acquisition, and Exhibit 2 shows Brekke Marine's results for 2026. Brekke Marine paid its only dividend of the year in December 2026. There were no transactions between the two companies other than the share purchase and the dividend, so no adjustment for unrealised profits is needed.

Solberg is building a model of Halvorsen Industrial's 2026 results. Her first step is to reconstruct the amounts that the company should report for the associate, so that she can check them against the published accounts. She plans to show the share of profit of the associate as a separate line in her income statement model, below operating profit, as Halvorsen Industrial does in its own presentation.

Solberg's colleague, Mats Eide, manages a portfolio that already owns Halvorsen Industrial shares. Eide has heard that Halvorsen Industrial may buy the founders' remaining shares within two years, which would give it control of Brekke Marine. He asks Solberg how Halvorsen Industrial's reported ratios would change if it already controlled Brekke Marine and consolidated it, rather than reporting Brekke Marine as an associate. To keep the comparison simple, Solberg agrees to assume that net income attributable to Halvorsen Industrial's shareholders would be the same under both approaches and that the only difference is the method of presentation. Exhibit 3 shows Halvorsen Industrial's 2026 revenue and its net income before the share of profit of the associate.

Eide also asks whether the dividend Brekke Marine paid in December will increase Halvorsen Industrial's reported profit for 2026. Solberg says she will answer once she has finished reconstructing the investment account, because the answer depends on how the equity method treats distributions from an associate.

Solberg notes that Halvorsen Industrial's investor presentation describes the Brekke Marine stake as giving the group a footprint in software, which management expects to support margins over time. She intends to test that claim separately once she has the reported figures right.