The difference between the fair value and equity methods of accounting for investments
#1.In your own words, the difference between the fair value and equity methods of accounting for investments. In what situations would an accountant use one method over the other? What drawbacks, if any, are associated with each method?
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#2. The Fair Value method of accounting for investments is used when the holdings are 20% or less. Fair Value lists these holdings as “available-for-sale” on the books. The Equity method is used when holdings are 20% or more. They are then listed as an investment because they now hold significant influence. The Equity method requires the amount of the investment to change (increase/decrease) depending on value of the investment. Accountants would use the Fair value method when there is a small percentage of holding (less then 20%) and the company does not need to keep track of ups and downs. They could also use this if they do not have enough personnel to keep track of the ups and downs. The Equity method would be used if their is a large holding in the the investment and the company needed to keep track of the ups and down. They could use this knowledge to know when to sell or if to buy more. The drawbacks of the Fair value method include not knowing the current value of the investment. The drawback of the Equity Method is that a lot of time is spent doing the accounting entries to keep up with the investment’s value
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#3. Held-to-Maturity Debt Securities
Debt Securities classified as “Held-to-Maturity” are accounted for at amortized cost, rather than fair value.
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