Equity method & Fair value (inv.in associates)

Quick question, assuming US GAAP, if you decide to record inv in associates under the fair value method instead of equity method, what would happen to the amount recorded if your investment (lets assume is on a publicly traded company) had a drop in the market value ? Would the unrealized loss have to be recognize on the I/S or through OCI ? Is this remotely related to an impairment ?

On a similar note, if the inv. was recorded using the equity method what would be the solution if the above happened ? Should we ignore FV since investment was recorded at cost until the FV is lower than the carrying value in our books (impairment)?

I was revising this topic and I suddenly froze with some of this questions, would really appreciate some help,


Hi Luisjgs00, I am studying with CFAI and consulted Reading 14, Section 5.4. If the fair value option is elected, all unrealized gains/losses, dividends, and interest are reported on the IS and the carrying value on the BS is adjusted to the fair value of the investment at each reporting period.

So to answer your first question, if the public company’s equity declined, the unrealized loss would be recognized on the IS.

To answer your second question, if the same scenario occurred but the investment was accounted for using the equity method, the change in market value would be ignored. Your investment balance on the BS would be value at beginning of year + % share of equity income - % share of dividends.

Hope this helps.

Thanks a lot , yes thats everything I needed to confirm.

Regarding Investment in Associates you HAVE TO use The Equity method. I’m I wrong ??

You’re not wrong.

You are right, I mixed the terms on the question ,my bad, I meant that you can either account for the investment at cost or at fair value under US GAAP but both fall under the Equity Method

if The fair value is greater than The book value, you will account for goodwill, but you have to use The equity method