When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment

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When a company has acquired a "passive interest" in another corporation (usually defined as an ownership interest of less than 20%), the acquiring company should account for the investment by using the fair value method. This involves initially recording the investment at cost, and then subsequently adjusting the investment to fair value each reporting period. The fair value adjustments are recorded in the income statement as unrealized gains or losses. The equity method and consolidation are typically used for ownership interests of 20% or more, and the effective interest method is typically used for debt investments.

When a Company Has Acquired a "Passive Interest" in Another