Accounting Theory Case

902 Words4 Pages
Case 10-7 Impaired Abilities Scenario A On March 31, 2010, at the end of its first quarter, Company A owned a portfolio of investment-grade, fixed-rate debt securities classified as available for sale. Because of interest rate increases that occurred between the date that certain securities were acquired and March 31, 2010, a material portion of the portfolio was “underwater.” Company A evaluated this decline in fair value to determine whether it is other than temporary and concluded that the decline is temporary. Company A provided the auditors with a brief memo documenting its conclusion as of the period end as follows: M EM O R AN D U M

Company A Files Controller March 31, 2010 Assessment of Impairment

…show more content…
On April 30, 2010, A sold certain of the “temporarily impaired” debt securities in its portfolio and realized a loss on the sale. Management told the auditors that the reason for the sale was that A’s head trader decided to sell these securities and invest in new securities that would provide A with an increased yield. Required: • You have been asked by the engagement partner to (1) react to both the client memo and other related information and (2) provide a supported position regarding the appropriate accounting for these securities as of the March 31, 2010, balance sheet date. Would your position be affected if the fair value of the debt securities declined below historical cost by only 2 percent? Why or why not?

Copyright 2007 Deloitte Development LLC All Rights Reserved.

Case 10-7: Impaired Abilities

Page 3

Scenario B On February 1, 2010, Company X purchased 100,000 common shares of Company B, a large retailer of designer shoes that also has a wholesale division, for $90 per share. The securities are classified as available for sale. As of December 31, 2010, X’s year-end, the fair value of X’s investment in B has declined below historical cost. Over the past year, the fair value of the security and related
Get Access