Question

Your client, Cascade Company, is planning to invest some of its excess cash in 5-year revenue bonds issued by the county and in the stock of one of its suppliers, Teton Co. Teton's shares trade on the over-the-counter market. The company would like you to conduct some research on the accounting for these investments.
Research accounting issues listed below using the FASB Codification to illustrate the application of GAAP.
Since the Teton shares do not trade on one of the large stock markets, Cascade argues that the fair value of this investment is not readily available.
According to the authoritative literature, when is the fair value of a security "readily determinable"?
How is an impairment of a security accounted for?
To avoid volatility in their financial statements due to fair value adjustments, Cascade debated whether the bond investment could be classified as held-to-maturity; Cascade is pretty sure it will hold the bonds for 5 years.
How close to maturity could Cascade sell an investment and still classify it as held-to-maturity?
What disclosures must be made for any sale or transfer from securities classified as held-to-maturity?

Instructions:
Provide Codification references for issues listed above
Write a memo to your client explaining accounting treatment for the above investments based on your FASB Codification research

Answer 1

Answer:

Memorandum

Date 27th March'2017

To: Cascade Company

Subject: Re: Accounting treatment for the investments based on FASB Codification research

Purpose

This memorandum addresses the investment concern of Cascade Company in Teton Co. about accounting treatment based on FASB Codification research

Details

Query- 1). Since the Teton shares do not trade on one of the large stock markets; Cascade argues that the fair value of this investment is not readily available. According to the authoritative literature, when is the fair value of a security “readily determinable”?

Query- 2). How is an impairment of a security accounted for?

Query- 3). To avoid volatility in their financial statements due to fair value adjustments, Cascade debated whether the bond investment could be classified as held-to-maturity; Cascade is pretty sure it will hold the bonds for 5 years. How close to maturity could Cascade sell an investment and still classify it as held-to-maturity?

Query- 4). What disclosures must be made for any sale or transfer from securities classified as held-to-maturity?

Issue:

1) To determine accurately the fair value of the security of a given firm or Company, the necessary three conditions to be met are:  

• The fair value per share, in another word known as a unit must be indomitable and in print.  
• At this point, the unit qualifies to be the basis for current transactions.  
• In an event the fair market value of an equity security is determined then the sales price can be easily reached on a securities exchange which is registered with the United States Securities and Exchange Commission.
• The sales price also can made be available in the over the counter markets. The last condition relates in foreign market situations exclusively. The overseas market should be analogous in width and extent to the American markets pursuant to (FASB, ASC 320-10-20).

2) The impairment of a security is accounted for by evaluation of the impairment test to the level of loss in value showing exterior the temporary measures. The company is allowed to take stepladder to recognize and account for securities grouped as either available for sale or held to maturity by making an assessment of whether a decline in fair value down the amortized cost basis is other than temporary. Providing a general allowance for anonymous impairment in securities portfolio in an inappropriate way (FASB, ASC 320-10-35-18). Additionally, amortized initial outlay exceeds the fair value of a project or investment at the date of balance sheet reporting period for which the respective impairment is assessed, the impairment is either other than temporary or temporary”(FASB, ASC 320-10-35-30).

3) To classify a bond as a held to maturity investment, the company must have the affirmative intent and capability to hold respective securities to maturity (FASB, ASC 320-10-25-1). In case the bonds were sold as a five-year term, it would be satisfactory to categorize the asset as held-to-maturity. It depends upon standard to sell a held-to-maturity security early. The sale of a held-to-maturity security must be in rejoinder to an actual decline, not mere conjecture, to the credit worthiness of the issuer pursuant to as according to (FASB, ASC 320-10-25-5(d)). Cascade can only sell the security based on the standards adjoining held-to-maturity categories if following conditions are met:

• The security sale appears near adequate to its maturity time (or call period if exercise of the call is plausible) that risk on interest rate is significantly removed as a pricing factor, or  
• The sale of a security appears after the firm has already unruffled a considerable portion of the principal outstanding at acquisition due either to scheduled payments on a debt security payable in equal installments or to prepayments on the debt security (it would include both principal and interest) over its term period (FASB, ASC 320-10-25-14).

4) The entities must disclose the following for either the sale or transfer from securities classified as held-to-maturity:

• The net carrying amount of the security transferred or sold.
• The aggregate amount of net gain or loss that is accumulated in other comprehensive income for derivatives which is hedged the predetermined acquisition of the security held-to-maturity.
• The correlated amount realized or unrealized loss or gain
• The state of affairs leading to the decision to sell or transfer the security. (These transfers or sales should be rare on exceptions for transfers or sales due to the changes in conditions in accordance to paragraph 320-10-25-6(a) through (f))” (FASB, ASC 320-10-50-10).