Fair Value, Equity Method or Consolidation

Introduction

At the end of 2025, Amazon carried $69.1 billion of equity, warrant and convertible debt investments in other companies, accounted for in at least four different ways. Its stake in Rivian, a listed carmaker, was marked to market, and its fall in value drove most of Amazon's $2.3 billion of net other expense in 2024. Its convertible notes in Anthropic, the artificial intelligence company, were carried at fair value with gains held in other comprehensive income, until part converted in 2025 into nonvoting preferred stock carried at cost, adjusted for observable price changes. Its stakes carrying significant influence produced a $554 million loss, mostly from impairments. And controlled businesses such as Whole Foods were consolidated line by line.

The method a company uses for an investment depends on how much influence or control it has over the investee, not on how much it has invested. The choice changes almost everything: whether the investee's revenue and debt appear in the investor's statements, whether profits are recognized as they are earned or only when dividends are paid, and whether market movements reach earnings. For a banker, identifying the method is the first step in valuing a company with stakes in others.

US generally accepted accounting principles (GAAP) sort investments in other companies' equity by the investor's influence:

The percentages are presumptions, not rules. Under Accounting Standards Codification (ASC) 323, significant influence is presumed at 20% or more of the voting stock and presumed absent below it, but either presumption can be overcome by evidence, as Deloitte's guide to the general presumption explains.

Significant influence

The ability of an investor to influence the operating and financial policies of an investee without controlling it, under ASC 323. It is presumed when the investor holds 20% or more of the voting stock, and is indicated by board representation, participation in policy-making, material transactions between the companies, interchange of managers or technological dependence.

Control is usually a majority of the voting shares, but it can also arise without one. A company can control an entity through contracts, guarantees or other arrangements that give it the power to direct the activities that most affect the entity's performance, together with exposure to losses or benefits that could be significant to it; that is the variable interest entity model, covered in variable interest entities. And a majority holder may lack control if minority shareholders have rights to block the key decisions of the business.

An investor without significant influence is a portfolio investor, and the accounting treats the stake as a financial asset. Since Accounting Standards Update (ASU) 2016-01 created ASC 321, equity securities with a readily determinable fair value, such as listed shares, are measured at fair value with every change recognized in net income. Amazon's Rivian stake works this way: when Rivian's share price fell, Amazon's other income fell with it, even though nothing had been sold. Amazon also holds warrants to buy shares in private companies, and carries those at fair value too, with changes in other income.

Equity investments in private companies, which have no market price, may instead use the measurement alternative: the investment is carried at cost, less any impairment, and adjusted up or down only when there is an observable price change in an orderly transaction for an identical or similar security of the same issuer, such as a new funding round. The result is a carrying amount that stays still for long periods and then jumps.

Measurement alternative

The option, under ASC 321, to measure an equity investment without a readily determinable fair value at cost, less impairment, adjusted for observable price changes in orderly transactions for identical or similar securities of the same issuer. It is elected investment by investment and continues until the investment gains a readily determinable fair value.

The FASB's later clarifications in ASU 2018-03 require each adjustment to reflect the price on the date of the observable transaction, not the reporting date, and allow a company to switch irrevocably to full fair value for all similar investments in the same issuer.

Debt securities follow a different set of categories, trading, available-for-sale or held-to-maturity, with gains on available-for-sale debt going to other comprehensive income until the security is sold. The rules for both kinds of security are covered in investments in securities: fair value accounting.

Amazon's Anthropic Stake

Amazon's investment in Anthropic shows how the categories can change for a single relationship. It invested largely through convertible notes, which as debt securities were classified as available-for-sale and carried at fair value, with unrealized gains in other comprehensive income. In 2025, part of the notes converted into nonvoting preferred stock. On conversion, the accumulated gains on the converted notes, $5.6 billion, were reclassified into net income. The preferred stock, an equity investment in a private company, then used the measurement alternative, and Amazon recorded a further $7.7 billion of upward adjustments to its equity investments in private companies for observable changes in price, primarily on the Anthropic preferred stock, as its 2025 annual report explains.

Together, those items drove most of Amazon's $15.2 billion of other income in 2025. Amazon accounts for the preferred stock outside the equity method; under ASC 323, that method applies only to common stock or in-substance common stock, and preferred shares with a substantive liquidation preference over the common do not qualify. None of the gain was cash, and much of it reflects observable transactions in a private company's shares rather than a market price.

With significant influence, the investor stops treating the stake as a portfolio asset and records its share of the investee's results. It carries the investment as a single asset at cost, increases it by its share of the investee's net income, reduces it by its share of losses and by dividends received, and reports its share of the investee's earnings as a single line in its own income statement. The approach is sometimes called one-line consolidation: the investor's net income includes its share of the investee's profit, but none of the investee's revenue, expenses, assets or debt.

Three details matter in practice. If the investor paid more than its share of the investee's book value, the excess is attributed to the investee's assets, and amortization of any amount assigned to finite-lived assets reduces the investor's share of earnings. Equity method investments are tested for impairment when their value appears to have fallen below carrying amount for reasons that are not temporary, which is where most of Amazon's 2025 equity method loss came from. And losses stop being recorded once the investment reaches zero, unless the investor has committed to fund the investee. Because the investee's own statements are invisible in the investor's, disclosure fills the gap: public companies must give summarized balance sheet and income statement information for significant equity method investees, and Securities and Exchange Commission (SEC) rules require full financial statements of an investee that is large enough relative to the investor under the significance tests. Those disclosures are often the only way to see an investee's revenue and debt. The mechanics are traced in equity method income on the three statements, and the method itself is covered in the equity method of accounting explained.

The Fair Value Option for Influential Stakes

An investor with significant influence can elect the fair value option instead of the equity method, investment by investment and at the outset, carrying the stake at fair value with changes in value in earnings. Few industrial companies choose it, because it brings market volatility into earnings, but some financial groups and holding companies do, so that their reported results reflect the market value of their stakes rather than a share of book earnings. The election is irrevocable, and a company that uses it must still disclose summarized information about significant investees.

Joint Ventures

Where two or more parties share control of a business by contract, each typically accounts for its interest in the joint venture under the equity method, whatever its percentage. Proportionate consolidation, in which each party reports its share of the venture's assets, liabilities, revenue and expenses, is allowed under US GAAP only in narrow cases, mainly unincorporated ventures in the construction and extractive industries. The accounting for jointly controlled arrangements is covered in joint ventures and joint operations.

Once an investor controls another company, the investee becomes a subsidiary and, under ASC 810, its financial statements are combined with the parent's, line by line. Every asset and liability of the subsidiary appears on the consolidated balance sheet, every revenue and expense in the consolidated income statement, and every cash flow in the consolidated cash flow statement, even if the parent owns only 60% of the shares. Balances and transactions between group companies are eliminated, so the group reports only its dealings with outsiders.

The portion of the subsidiary owned by outside shareholders is presented as noncontrolling interest: a separate component of equity on the balance sheet, and a separate allocation of net income below the consolidated total. The mechanics are covered in consolidation: when you control a subsidiary and noncontrolling interest.

Majorities Without Control and Control Without a Majority

Voting control can be qualified by the rights of others. If minority shareholders hold substantive participating rights, such as a veto over the operating budget, senior appointments or major capital spending, the majority owner may not control the subsidiary and may instead use the equity method. A subsidiary in bankruptcy, under the control of a court, is generally deconsolidated. In the other direction, an investor with less than half of the votes can be required to consolidate an entity it controls through contracts or financial support, under the variable interest entity model, and a limited partnership whose limited partners can neither remove the general partner nor take part in key decisions is itself a variable interest entity, consolidated by the general partner only if it also holds an economic interest that could be significant.

Investment Companies

Investment companies, such as private equity, venture and hedge funds that meet the criteria in ASC 946, are the main exception to consolidation. They carry all their investments, including controlling stakes in portfolio companies, at fair value, because their business is to hold investments for returns rather than to operate them. A buyout fund that owns 100% of a manufacturer therefore reports one line, the manufacturer's fair value, rather than its revenue and debt. The asset managers that sponsor such funds may themselves consolidate some funds they control, which is why their own statements can carry large fund assets and noncontrolling interests.

Consider an investee with revenue of $500, expenses of $400 and net income of $100, which pays $40 of dividends during the year and whose market value rises from $2,000 to $2,200. Compare an investor holding 15%, 30% or 60% of its voting shares:

The investee's year is identical in all three cases, but the reporting is not. The fair value investor's income depends mostly on the share price. The equity method investor's income tracks the investee's earnings, regardless of the share price, and its revenue is untouched. The consolidating investor reports $500 more revenue, $400 more expenses and all of the investee's debt, although only 60% of the result belongs to its own shareholders.

When a stake crosses from one method to another, the accounting has its own rules: gaining control remeasures any previously held stake to fair value, with a gain or loss in earnings, and losing control does the same for any retained interest. Those transitions are covered in step acquisitions and changes in ownership.

The method determines where an investment's value shows up in a valuation, and so how it must be handled:

The treatment of non-operating assets in valuation is covered in non-operating assets and excess cash.

Cash Flow and Credit Analysis

The cash flow statement treats the three methods differently as well. Dividends from fair value stakes are operating cash flows. Dividends from equity method investees are operating cash flows to the extent they represent a return on the investment, and investing cash flows beyond that, as a return of the investment; under the cumulative earnings approach, one of two methods ASC 230 allows, the dividing line is the investor's cumulative share of earnings. Purchases and sales of stakes are investing flows. A consolidated subsidiary's cash flows are simply part of the group's, and an acquisition of control appears as an investing outflow net of the cash acquired with the subsidiary.

For credit analysis, the methods hide and reveal different things. An equity method investee's debt does not appear in the investor's debt at all, even if the investor is economically exposed to it, while a consolidated subsidiary's debt appears in full, even if it is ring-fenced from the parent. Lenders and rating agencies often look through both, adjusting leverage for the investor's proportionate share of significant investees and for any debt that is not recourse to the parent. In industries where joint ventures are common, such as energy, chemicals and infrastructure, analysts often build proportionate figures for the whole group, adding the investor's share of each significant investee's revenue, EBITDA and debt, so that companies holding similar assets through different structures can be compared.

Amazon's 2025 results are a reminder that the choice of method can move earnings by more than most operating decisions. A company's investment portfolio can be a source of real value, but the accounting presents that value in very different ways depending on influence and control, and only by identifying the method can a banker put each stake in the right place.