Question

please explain how the decline in fair market value of equity investments affect the financial statements

Answer 1

The fair market value means the value of an asset that would be fetched if sold in the market at that time. Means it is a market value of an asset.

Equity investments are recorded at cost at the time of purchase of equity and reported at fair value on the balance sheet date and if any losses or gains that occur at the time of balance sheet date, they are accounted for. This unrealized gains or loss can be reported as comprehensive income/loss it can be reported under income statement or the statement of change of equity.

A decline in the fair value of the equity would be reported by reducing or bringing down the value of the equity investment up to fair value.

So if the equity investments of the company decline then it will affect the income statement as well as the investment in equity means on assets. A decline in equity investment fair value will reduce your profits and reduce the assets of the company. As equity investment would be credit and unrealized loss would be debited.

The fair value method/cost method is used only when the equity investment is less then 20%.