Basis Differences and Fair Value Adjustments
Purchase Price Allocation
If the purchase price exceeds the investor's share of the investee's book value, the excess may relate to fair value adjustments for identifiable assets or goodwill. These basis differences affect future equity method income through depreciation or amortization.
- Allocate excess purchase price.
- Identify depreciable and amortizable assets.
- Adjust future investment income accordingly.
Note
Goodwill associated with an equity method investment is included within the investment account.
Summary
Basis differences ensure the investor recognizes its share of earnings using fair value adjustments.