When a company purchases equity securities or invests in another company, there are three ways the investment can be reported: 1) Fair value option, equity method, and consolidation method.
The fair value method is used when ownership is less than 20% of the company’s outstanding shares and the investor does not have significant influence.
When the fair value method is used, the company would classify the investment as “trading” or “available-for-sale”.
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What is the difference between the fair value method and the equity method?
The main difference relates to the amount of ownership the company has in another entity. If the company owns less than 20% of the outstanding shares for the company they invested in, then the fair value method (i.e., cost method) is used. If the company owns between 20% to 50% of the outstanding shares, then...
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How are changes in fair value for equity securities recorded on the income statement?
Treatment varies depending on whether its classified as “trading” or “available-for-sale”. Additionally, you must determine whether the decline in fair value is temporary or other than temporary (i.e. permanent). Remember, to determine whether or not significant influence exists. For trading securities, unrealized and realized losses are recorded in the income statement. For available-for-sale securities, assuming...
What is the difference between the fair value method and the equity method?
The main difference relates to the amount of ownership the company has in another entity. If the company owns less than 20% of the outstanding shares for the company they invested in, then the fair value method (i.e., cost method) is used. If the company owns between 20% to 50% of the outstanding shares, then...
How are changes in fair value for equity securities recorded on the income statement?
Treatment varies depending on whether its classified as “trading” or “available-for-sale”. Additionally, you must determine whether the decline in fair value is temporary or other than temporary (i.e. permanent). Remember, to determine whether or not significant influence exists. For trading securities, unrealized and realized losses are recorded in the income statement. For available-for-sale securities, assuming...
