Question

In your own words, explain why the company may choose to account for its share investments at “fair value through other comprehensive income” over “fair value through profit or loss".

Answer 1

In Share investments, the stock prices fluctuate very much which may have a huge impact on Actual Profits earned by the company in its due course of business. While bringing share investment at their fair value, the profit/loss arises on share investments are just indicative and not actual.

If the company chooses to account for share investments at “fair value through profit or loss" then it will increase/decrease the actual profits of the company which may cause confusion between the investors about the stability of the profits earning by the company. It also becomes very difficult to compare financial statements of different years because there may be profit in share investments in one year and loss in another year.

So, companies choose to show their share investment at “fair value through other comprehensive income”. It gives more clarity and gives a fair view of the Income statement to the investors and other stakeholders. Further, the investor, management, and other stakeholders can check the increase/decrease in the price of share investments easily through Other Comprehensive Income.

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