Accounting Methodologies
Amortized Cost
If a business holds debt securities to maturity with the intent to sell are classified as held-to-maturity securities. Held to maturity securities are reported at amortized cost less impairment.
Fair Value
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Fair value
Fair value, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset.
Fair value, also called fair price, is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of goods, services, or assets, taking into account such objective factors as:
- acquisition/production/distribution costs, replacement costs, or costs of close substitutes;
- actual utility at a given level of development of social productive capability;
- supply vs. demand;
- subjective factors such as risk characteristics, cost of and return on capital and individually perceived utility.
Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. These securities are reported at fair value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity (Other Comprehensive Income).
Equity Method
Equity method in accounting is the process of treating equity investments, usually 20–50%, in associate companies. The investor keeps such equities as an asset. The investor's proportional share of the associate company's net income increases the investment (a net loss decreases the investment), and proportional payment of dividends decreases it. In the investor's income statement, the proportional share of the investee's net income or net loss is reported as a single-line item.The ownership of more than 50% of voting stock creates a subsidiary. Its financial statements consolidate into the parent's.
The ownership of less than 20% creates an investment position carried at historic book or fair market value (if available for sale or held for trading) in the investor's balance sheet.