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Questions and Answers
What is fair value defined as?
How are initial investments in equity securities recorded?
What happens if fair value is not readily determinable for an investment?
How are dividends received in excess of earnings subsequent to the date of investment treated?
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In what circumstances can a decrease in value of an investment be recognized as other than temporary?
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Why are shares bought by investors in anticipation of cash dividends or appreciation of stock market values?
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What are two exceptions noted by FASB ASC regarding the cost basis for reporting investments?
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Study Notes
Fair-Value Method
- Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Characteristics of Investments Recorded at Fair Value
- Investments are bought in anticipation of cash dividends or appreciation of stock market values.
- These investments are recorded at cost and periodically adjusted to fair value.
Basic Principles of Fair-Value Method
- Initial investments in equity securities are recorded at cost and subsequently adjusted to fair value if fair value is readily determinable.
- If fair value is not readily determinable, the investment remains at cost.
Exceptions to Cost Basis
Exception 1: Dividends Received
- Dividends received in excess of earnings subsequent to the date of investment are considered returns of the investment.
- These dividends are recorded as reductions of cost of the investment.
Exception 2: Decrease in Value
- A series of an investee’s operating losses or other factors can indicate a decrease in value of the investment has occurred.
- This decrease in value is recognized as other than temporary and should be recorded accordingly.
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Description
Learn about the fair-value method in investment accounting, which defines fair value as the price received to sell an asset or paid to transfer a liability. Understand how investments are recorded at cost and periodically evaluated under this method.
