(1) Investment account on balance sheet does not reflect investor’s proportionate share in investee’s earnings, dividends, or other distributions. Why is that? (Doesn’t investor get dividends? ultimately he owns some proportion of shares of the company, right?
(2) Excess of cost over fair value of identifiable net assets is not amortized. Where and how is this excess reported? Becuase goodwill is also not created
The simplist way to think about this is that is basically becomes a HFT or FV investment and is economically treated the same (unrealized and realized gains and losses and interest and dividends flowing through to income).
Well, dividend distribution is realilzed gain, isn’t it?
Also Excess of purchase price over fair value has to be reported somewhere to match up where does that go?
Yes and it goes through to income. There’s no concept of excess of purchase price because you are just measuring the investment at fair value.
think of it as if I purchased 20% of Apple stock and that gives me significant influence, but I decide to use the fair value option for this equity method investment. I would simply represent on my balance the fair value of Apple stock (the stock price) and report the price changes and dividends through income. I ignore the other equity method processes and just account for it as if it were a HFT or FV financial asset.
Lets say there is a private company.
You invest 120K for 25% stake. (This gives company a valuation of 600K)
When valuing the assets and liabilities of the comany using fair value model, you come up to 400K. 25% of which is 100K
You spend 120K and on your balance sheet report 100K of assets using fair value. (you have to show 20K as something… like sunk cost or something)
You are not allowed to create goodwill… so I don’t understand the concept.
“You invest 120K for 25% stake.”
That’s the answer right there. You just record 120k as the fair value of your investment on your balance sheet, and that’s it. The rest is ignored.