Fair Value Method
Accounting for Passive Investments
The fair value method is generally used when the investor does not have significant influence over the investee. Investments are measured at fair value, with changes generally recognized in net income under U.S. GAAP.
- Initial recognition at purchase price.
- Subsequent measurement at fair value.
- Dividends generally recognized as income.
- Unrealized gains and losses usually flow through earnings.
Note
Fair value accounting emphasizes current market values rather than historical cost.
Summary
Passive investments are primarily reported at fair value, with periodic remeasurement.