Explain the equity method of accounting and compare it to the fair value method for equity...

Explain the equity method of accounting and compare it to the fair value method for equity securities.

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Equity Method of accounting investment in other company is used when the investing company has significant influence over the Investee Company. A company holding 20% or 50% is taken as significant influence whereas as a company holding 9% of shares of other company will not be called as having influence over other company. The value of investment needs to be higher. If a Company does not have significant influence then Fair Value method of valuating Investment is used.

Under Equity Method the Percentage owned by investing company is calculated such as 30%. The value of the investment is increased by the portion of income earned by Investor Company in Investee Company. Under fair value method the investor company records any income in case fair value of investment is increased (note--fair value is taken as market price of share).

Under Equity method any dividends received from Investee Company is deducted from the Value of Investment since portion of profit earned on Invested shares is already considered. On the other hand under Fair value Method dividend received is considered as a income and not adjusted with book value of Investment.

The Investor Company records their portion of Investee’s Income in his Books of Accounts where as under fair value method income is booked as unrealized gains or Other Comprehensive income when Market price of shares is increased.

ekkarill92 answered 2 years ago

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