apb18

SUMMARY POINTS OF THE EQUITY METHOD

A.	Initial investment in stock recorded at cost.
	1.	Subsequent to acquisition, the investment account is:
		i.	increased for the investor's share of investee's income.
		ii.	decreased for dividends from investee.
		iii.	decreased for amortization of asset appreciations that are subject to depreciation.
		iv.	decreased for permanent impairments in value.
B.	Critical event for income recognition by the investor is the earning of income by the investee
	1.	investor debits investment account and credits Equity in the Earnings of Investee Company (investment income) for investor's share of investee's income.
	2.	investment account reflects the investor's share of the underlying equity in the net assets of the investee.
C.	Dividends from investee reduce the carrying value of the investment.
	1.	Dividends received represent an asset conversion event rather than an asset creation event.
	2.	Assets of the investor do not increase as a result of the dividends transaction.
D.	Any asset appreciations implicit in the acquisition price that are subject to depreciation must be amortized.
	1.	Investment income is reduced(debited) with a corresponding reduction in the Investment in Investee account.
	2.	Any goodwill is not amortized but is reviewed for possible impairment in accordance with paragraph 19(h) of APB Opinion No. 18. (see para. 40 of FAS No. 142)
E.	Liquidating dividends pose no particular problem for the investor company.

SUMMARY POINTS OF THE COST (FAIR VALUE) METHOD

A.	Initial investment in stock recorded at cost.
	1.	Subsequent to acquisition, the investment account may need to be adjusted for
		i.	any permanent impairment of value.
		ii.	liquidating dividends.
		iii.	changes in fair (market) value at the balance sheet date.
B.	Income earned by the investee is ignored by the investor. There is no accounting entry on the investor's books.
C.	Dividends from the investee represent the critical event for income recognition by the investor.
	1.	Dividends are recorded as dividend income.
	2.	Dividends do not affect the Investment in Investee account.
D.	Any asset appreciations implicit in the purchase price are not recognized by the investor.
E.	Any changes in market value at the balance sheet date must be recognized as a gain or loss. If the security is classified as trading, the gain or loss is included in earnings for the period. If classified as available-for-sale, the gain or loss is included in other comprehensive income. See FAS No. 115 for further discussion.
F.	Liquidating dividends must be recognized by the investor.
	1.	Liquidating dividends occur when the investee company has distributed more dividends than it has earne since the investor company made its investment in the investee company.
	2.	liquidating dividends reduce the carrying amount of the Investment in Investee account on the books of the investor.