Cost and Equity Method Flashcards
Under what conditions do you present under the cost method?
There is no influence over the investee or the security isn’t marketable. (Own
Under what conditions do you present under the equity method?
The investor has significant influence over the investee, either through business relationship, leadership or ownership. (Own 20-50%)
Under what conditions do you consolidate?
The investor is in control of the investee, either through majority common board or over 50% ownership.
When is income recognized under the cost method?
When dividends are received.
When is income recognized under the equity method?
When the investee generates income.
When transitioning from equity method to cost, what method is used going forward?
Cost (Prospective)
When transitioning from cost method to equity method, what method is used going forward?
Equity (Retrospectively applied to earlier periods for the % held at the time) This may require prior period adjustments to income.
What are the election dates when the FMV election can be elected?
- When the item is first recognized or a firm commitment is entered into.
- When items previously presented at fair value due to specialized accounting principals with unrealized gains or losses recognized in earnings no longer qualify.
- When there’s a change in the method of accounting for an equity investment such as to or from the equity method or ceasing to consolidate an investee.
- When an item is required to be measured at FMV on a one0time basis but is not required to be adjusted to fair value on subsequent dates.
When is the FMV election revocable?
Never. It may be changed on subsequent election dates, however.
How are securities under the FMV election recorded?
Equity- FMV written up or down against income after backing out dividends.
Held to Maturity Investments- Accounted for under amortized cost, then adjusted to FMV against income.
