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Equity Securities Determinable Fair Value

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Equity Securities Determinable Fair Value

Equity securities that lack easily ascertainable fair values are valued at cost less
impairments and any price fluctuations. The difference in an investment's true value and its
carrying price should be included in the organization's net income if an equity instrument
without an easily ascertainable fair value is impaired (Dynamics,2023). At the moment of
acquisition, stocks that lack easily ascertainable fair values are quantified employing the cost
method. For future market fluctuations or the success of the invested firm, the cost is not being
adjusted. Income from dividends from equity securities is recorded when it is earned; the
investment's value remains constant on the financial statement. An accountable entity must
assess a stock at fair value whenever the qualitative calculation reveals that that there's a loss
between the two holdings. For instance, ABC International pays $1,000,000 for a 10% stake in
Purple Widgets Company. Purple reports net income of $100,000 for its most recent financial
period, and distributes dividends of $20,000.
The equity method is a different approach used to evaluate equity securities without
easily ascertainable fair values. Equities are first reported at cost under the equity approach,
which is comparable to the expense method (Amir et al., 2020). The investor's portion of the
investee's net profit or loss along with other total revenue, however, are adjusted afterwards. The
current value of the stake on the investor's financial statements is changed as a result of these
modifications. For instance, General electronic takes into account its ownership interest in Baker
Hughes using the equity approach due to the lack of clearly ascertainable fair values and the low
activity in the markets. By recording its portion of Baker Hughes' net gain or loss, GE updates
the asset's current value on its financial statements.

References

Dynamics, G. (2023, June 13). Overview of Accounting for Investments in Equity Securities
(ASC 321) | GAAP Dynamics. Retrieved from
https://www.gaapdynamics.com/insights/blog/2018/02/06/overview-of-accounting-for-
investments-in-equity-securities-asc-321/

Amir, E., Ghitti, M., Amir, E., & Ghitti, M. (2020). Introduction to Accounting for Inter-
corporate Investments. Financial Analysis of Mergers and Acquisitions: Understanding
Financial Statements and Accounting Rules with Case Studies, 3-24.
https://link.springer.com/chapter/10.1007/978-3-030-61769-1_1