Study On Accounting Methods Of Uncontrolled Unquoted Equity Investment Whose Fair Value Cannot Be Reliably Measured

Based on Chinese accounting principle and accounting environment, this study focuses on finding the reasonable accounting method of uncontrolled unquoted equity investment whose fair value cannot be reliably measured by analyzing its qualitative characteristics, comparing it to international accounting method and giving out a real case of it. By applying those methods, this study concluded the accounting method of this equity investment under our accounting standards, the accounting method under the new IFRS 9 and how can we apply the two-category method of financial assets in our country.According to Relevance, Comparability and Substance over Form, the study believes that uncontrolled unquoted equity investment whose fair value cannot be reliably measured should be measured as financial assets rather than long-term equity investments. According to the holding intention of this kind of investment, the study concludes that this equity investment should be measured as Available-for-Sale financial assets. Details as follow:a) Measured at cost; b) any gains and loss are recognized in profit or; c) impairment measured by future cash flow; d) when fair value can be reliably measured, measure it at fair value which gains and loss goes into equity; e) when a equity investment used to be measured at fair value those fair value can no longer be reliably measured, measured at cost. Regard the remaining fair value at initial date as cost. Gains and loss recognized in equity remain there.As those accounting methods seem reasonable, they still have some problem:a) the principle of financial instruments required all financial assets initial recognized at fair value; b) the method of impairment itself is the method of estimating fair value; c) historical cost lacks of relevance comparing to fair value; d) it may cause unnecessary fluctuation to the entity.IASB issued IFRS 9 of Financial Instrument which brought out the two-category method of financial assets. This study believes that unquoted equity investment will be better measured through two-category method.To demonstrate the two-category method illustrate this equity investment better, this study did research in the progress and reasons for applying two-category method given by IASB and FASB and analyzed fundamental qualitative characteristics of fair value and historical cost, and then concluded that this equity investment should be measured in fair value to achieve better accounting quality. However, the cost-benefit is not yet balanced.Under the new IFRS 9, uncontrolled unquoted equity investment whose fair value cannot be reliably measured should be measured either:a) at fair value through other comprehensive income; or b) at fair value through profit or lossAlthough IFRS 9 provided this more reasonable accounting method, china has too poor an environment to apply it due to its lack of estimation technique, high cost of applying this IFRS 9 and imperfection of law and regulation.To illustrate the accounting method, the study put a real case of unquoted equity investment that the Social Security Fund bought 2.19% shares of China Development Bank.