Accounting for companies - Term Paper Example

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The financial accounting standards board (FASB) has therefore developed standards that should be applied in consolidating such…

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Subject: Miscellaneous
Type: Term Paper
Level: Undergraduate
Pages: 4 (1000 words)
Downloads: 2
Author: christelle92

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The fair value method or the cost method is used in cases where the company’s ownership is 20% and below. In this method, the company has no significant influence on the operation and control of the subsidiary and will record the investment at cost. Here, the company will record the investment on the balance sheet at cost and will not be concerned with the valuation of the specific assets and liabilities. The dividends that are earned from the investment will be credited in the income statement of the holding company while losses will be debited to recognize and account for the impact (FASB, 2007).

Since the company has no rights on dividends on the investment unless declared, it will not record any dividends on the balance sheet of the company. In cases where the investment is in the form of marketable securities, the accounts will be adjusted to reflect the fair value at the end of each financial year (FASB, 2007). Equity securities that are not tradable are classified as available for sale in the balance sheet. Despite the lack of control on the purchased investment, many companies enter into such investment in order to earn lucrative dividends.

This income could be then invested in other projects to enhance the value of the holding company. At the same time, a company might venture in such investment in order to earn capital gain from the increasing share prices. The second method, equity method, is applied in the case where the investing company buys between 20% and 50% control on the subsidiary (IASB, 2011). This proportion is considered significant in influencing the operation of the subsidiary in as much as it is not sufficient in having exclusive control.

The holding company will account for the investment as an associate. The purchasing company will record the investment at cost in the balance sheet i.e. the original purchase cost is used. This

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