Montana Inc. is a privately held company with a December 31st fiscal year end. On October 1, 2018 Montana Inc. purchased $1,000,000 of bonds for Northwest, Inc. for $975,000. At the time of the investment the bonds were rated “A”. Montana had the ability and intent to hold the bonds until they matured on December 31, 2023 so the company correctly classified their investment in the bonds as Held to Maturity. Montana also has invested $8,000,000 in bonds of other business entities and also classified these holdings as Held to Maturity. During 2021 Northwest, Inc. encountered severe financial difficulties and in December 2021 the bonds issued by the company were downgraded to “CC”. As a result of this downgrade in the credit rating Montana has decided to sell the bonds and reclassifies the bonds on the 12/31/21 balance sheet as Available for Sale. The CFO is unsure that since the company will be selling the bonds prior to maturity it could indicate the company no longer has the intent & ability to hold other bonds until they mature. The CFO is concerned that change in classification from Held to Maturity to Available for Sale for the Northwest, Inc. bonds also applies to the other bonds that are currently classified as Held to Maturity. Accounting Issues: Is Montana, Inc. permitted to continue to classify its other bonds investments as Held to Maturity
Montana Inc. is a privately held company with a December 31st fiscal year end. On October 1, 2018 Montana Inc. purchased $1,000,000 of bonds for Northwest, Inc. for $975,000. At the time of the investment the bonds were rated “A”. Montana had the ability and intent to hold the bonds until they matured on December 31, 2023 so the company correctly classified their investment in the bonds as Held to Maturity. Montana also has invested $8,000,000 in bonds of other business entities and also classified these holdings as Held to Maturity.
During 2021 Northwest, Inc. encountered severe financial difficulties and in December 2021 the bonds issued by the company were downgraded to “CC”. As a result of this downgrade in the credit rating Montana has decided to sell the bonds and reclassifies the bonds on the 12/31/21 balance sheet as Available for Sale.
The CFO is unsure that since the company will be selling the bonds prior to maturity it could indicate the company no longer has the intent & ability to hold other bonds until they mature. The CFO is concerned that change in classification from Held to Maturity to Available for Sale for the Northwest, Inc. bonds also applies to the other bonds that are currently classified as Held to Maturity.
Accounting Issues: Is Montana, Inc. permitted to continue to classify its other bonds investments as Held to Maturity after the reclassification of the Northwest, Inc. bonds in the 12/31/21 Balance Sheet?
Codification Reference: _____________________
Your interpretation of the guidance: The correct classification for the 12/31/21 Balance Sheet of Montana’s investments in the remaining bonds is:
- Held to Maturity
- Available for Sale
The CFO is concerned that change in classification from Held to Maturity to Available for Sale for the Northwest, Inc. bonds also applies to the other bonds that are currently classified as Held to Maturity.
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