Fair-Value Method in Investment Accounting

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.

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.