Equity Method Investments & FAS 157
The equity method and fair value method are two ways to value an equity asset (such as stock in a company) for accounting purposes: the former is a fixed method based on the performance of the issuing company and any dividend payments, while the latter is more flexible and is based more on the market value of the asset itself. FAS 157 is an accounting standard that clarifies what factors are acceptable in a fair value calculation.
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Things You'll Need
- Financial records of stock purchase (both methods)
- Accounts of stock issuing company (equity method)
- Market data for stock or similar stocks (fair value method)
Instructions
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Equity Method
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1
Take the price you paid for the asset.
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2
Increase or decrease the original purchase price in line with the profit or losses announced by the company issuing the asset since the time of purchase. This should reflect the total proportion of the company that you own. For example, if you own a total of 1 percent of the company's stocks, and the company has made a profit of $100,000, the value of your asset increases by $1,000 ($100,000 X .01 = $1,000).
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3
Subtract the actual amount of any dividends you have received from the asset.
Fair Value Method
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4
Calculate the value of the asset by using its current market price, if the information is available..
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5
Calculate the value of the asset by referring to the market price of similar assets, if there is no market price for the asset. With a stock, this could be the market price of stocks in companies of a similar size and in a similar industry. This is the most common method used when there is no market price for the asset available. You also can use other measurable data, such as the current price at which the asset is selling in private trades.
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6
Use subjective measures to value the stock if no measurable data is available. You have more flexibility in using subjective measures. Whatever method you use should reflect any information that is readily available, and should attempt to mirror the way potential buyers would value the asset.
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1
Tips & Warnings
FAS 157, a ruling by the Financial Accounting Standards Board (which sets guidelines to ensure companies report accounts in a consistent and comparable manner) defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."
The fair value method uses a three-tier hierachy, meaning you only use the method in one step if you do not have access to the information needed for previous steps.
Any statement of financial accounts should give clear and accurate details of the method used to value assets.
