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Nonbusiness entities, such as an estate, trust, or an individual, are not required to account for their investments in common stock under the equity method of accounting even if they are able to exercise significant influence over the financial and operating policies of the investee. A nonbusiness entity is not precluded from the use of the equity method if it has significant influence. Rather, this exemption recognizes the diverse nature of nonbusiness entities and that the use of the measurement alternative or fair value to recognize these investments may better present the financial position and changes in financial position of such entities. Nonbusiness entities should consider applying the equity method of accounting to investments held for long-term operating purposes. However, nonbusiness entities generally would not use the equity method of accounting to account for portfolio investments.
Real estate investment trusts (REITs) are considered to have business activities, typically by earning income through real estate loans and investments, and therefore do not qualify for the nonbusiness entity exception. As a result, investments held by REITs should be analyzed to determine if the equity method of accounting should be applied.
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