The fair value method recognizes unrealized holding gains or losses on investments when their fair value is adjusted. This method requires that investments are recorded at their current fair value on the balance sheet, rather than at their initial cost. As a result, any increases or decreases in the fair value of these investments are reflected in the income statement, allowing for the reporting of unrealized gains or losses.
This approach contrasts with the cost method, where investments are maintained at their original purchase price and any changes in value are not recognized until the investment is sold. The equity method also does not typically recognize unrealized gains and losses in the same manner; it focuses on the proportional share of earnings or losses from an affiliated company, ignoring fair value changes until a transaction occurs.
Thus, the fair value method is specifically designed to capture the impact of market fluctuations on the value of investments, making it the correct choice for recognizing unrealized holding gains or losses.