How to calculate the fair value adjustment for the equity method?
One of the key differences between the equity method and the acquisition method is the fair value adjustment (the difference between the net book value and fair market value of the acquired subsidiary’s net assets) will be amortized using the straight-line method over the life of the asset’s remaining useful life.
The visual below shows how the fair value adjustment is calculated based on the difference between the FMV and NBV of the net identifiable assets acquired:
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What is the equity method?
When a company purchases equity securities or invests in another company, there are three ways the investment can be reported: 1) Fair value option, equity method, and consolidation method. The equity method is used when a company owns 20% to 50% of the outstanding stock of the investment and/or they have significant influence. Under the […]