Historically, Many Investments in Equity Instruments Issued by Other Entities

Historically, many investments in equity instruments issued by other entities had been accounted for using the cost model. Under that model, an investment is recognized at cost at the time of acquisition and income from such investments is recognized when the investee declares dividends from post-acquisition earnings. Explain the risks of using this model, and how the equity method enhances the relevance and faithful representation of financial statements as outlined in the Conceptual Framework.