2. The equity method of accounting for investments inunconsolidated subsidiaries permits the investor to recognize asinvestment income the investorâs percentage ownership share of theinvesteeâs reporting income rather than recognizing income only tothe extent of cash dividends actually received. The net effect isthat the investor, in most cases, records more income than isreceived in cash. Using research into FASB pronouncements, yourfinancial analysis experience, and your text book, answer two ofthe following questions:
What are the theoretical problems with regard to the recognitionof equity income?
What impact that this have for financial analysis and can theequity method be used to manipulate earnings?
If a company is using the equity method instead of the fairvalue method, what does this tell you about the level of controlover an equity investment?
What is the rational for restatement when the equity methodbecomes applicable through a series of acquisitions?
Currently fair value can be used to account for an equity levelinvestment (opting for use of fair value reporting must be made inthe first year the investment can be reported under the equitymethod). Is the accounting profession confusing financial statementusers by reporting equity level investments under more than one setof standards?
2. The equity method of accounting for investments inunconsolidated subsidiaries permits the investor to recognize asinvestment income the investorâs percentage ownership share of theinvesteeâs reporting income rather than recognizing income only tothe extent of cash dividends actually received. The net effect isthat the investor, in most cases, records more income than isreceived in cash. Using research into FASB pronouncements, yourfinancial analysis experience, and your text book, answer two ofthe following questions:
What are the theoretical problems with regard to the recognitionof equity income?
What impact that this have for financial analysis and can theequity method be used to manipulate earnings?
If a company is using the equity method instead of the fairvalue method, what does this tell you about the level of controlover an equity investment?
What is the rational for restatement when the equity methodbecomes applicable through a series of acquisitions?
Currently fair value can be used to account for an equity levelinvestment (opting for use of fair value reporting must be made inthe first year the investment can be reported under the equitymethod). Is the accounting profession confusing financial statementusers by reporting equity level investments under more than one setof standards?
