ACC 423 week 1 rewrite it (900 words)

Introduction

Cascade Company is planning to invest some of its excess cash in 5-year revenue bonds issued by the county and in its supplier, Teton Co., stock. Teton’s shares are traded on the over-the-counter market. Cascade Company has asked our company to conduct some research on the accounting for these investments. The following will be included in the research: determination of when the fair value of a security is “readily determinable”, how security impairments are accounted for, how close to maturity an investment could be sold and still be classified as held-to-maturity, and disclosures that must be made for the sale or transfer from securities classified as held-to-maturity. The remainder of this paper provides the results of our research.

Fair Value of a Security

Even though a company’s shares are traded on an over-the-counter market rather than one of the large stock markets, fair value is considered “readily determinable” if one of the following three conditions can be met: 1) sales prices or bid-and-asked quotations are readily available on a securities exchange that is registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, and are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by OTC Markets Group Inc., 2)  if an equity security is traded only in a foreign market, that foreign market must have a breadth and scope comparable to one of the U.S. markets referred to above, or 3) for an equity security that is an investment in a mutual fund, or a structure similar to a mutual fund, the fair value per share (unit) is determined, published, and is the basis for current transactions (FASB ASC, 320-10-20). Therefore, the fair value of Teton’s shares is readily available because they meet the first condition which makes them readily determinable.

Accounting for a Security Impairment

A security is considered impaired if the fair value is less than the amortized cost basis. When an impairment has been determined for an equity security, the loss is recognized in earnings equal to the difference between the investment’s cost and the fair value at the balance sheet date of the reporting period for which the determinations were made. The fair value of the investment becomes the new amortized cost basis (FASB ASC, 320-10-35-34). When an impairment has been identified for a debt security and the investment does not intend to be sold before maturity, as is the case for Cascade Company, the total impairment related to the credit loss is recognized in earnings and the amount of the impairment related to other factors is recognized in comprehensive income, net of taxes (FASB ASC, 320-10-35-34D).

Selling a Held-to-Maturity Investment

The 5-year revenue bonds that Cascade is planning to buy would be classified as held-to-maturity because it is more likely than not that they will hold the bonds for five years. Cascade could sell an investment and still classify it as held-to-maturity if it meets one of the two following conditions:

a. The sale occurs near enough to its maturity date that changes in market interest rates would not significantly impact the fair value of the security.

b. The sale of a security occurs after a substantial portion (at least 85 percent) of the principal outstanding at acquisition has been collected due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments over its term. For securities with a variable-rate, the scheduled payments do not have to be equal (FASB ASC, 320-10-25-14).

After Cascade Company has paid at least 85 percent of the principal outstanding at acquisition or changes in market interest rates would have no significant impact on the security’s fair value, they could sell the investment and still classify it as held-to-maturity.

Disclosures for Sale or Transfer of Held-to-Maturity Securities

Whenever a security is sold or transferred specific disclosures in the notes to the financial statements are required. For securities that are classified as held to maturity, the following disclosures must be made:

1. The net carrying amount of the security

2. The net gain or loss in accumulated other comprehensive income for any derivative that hedged the projected acquisition of the held-to-maturity security

3. Any realized or unrealized gain or loss related to the sale or transfer of the security

4. The events or reasons leading to the decision to sell or transfer the security (FASB ASC, 320-10-50-10).

This information is mandatory when a security that is held-to-maturity is sold or transferred.

Conclusion

After conducting research, the conclusions provided should give Cascade Company adequate information to determine the best decision about its plan to invest its excess cash in the 5-year bonds and Teton Co.’s stock. The fair value of Teton shares is readily available even though it is traded on an over-the-counter market. They can determine how security impairments are accounted for, how their bonds would be classified, how close to maturity they can sell their held-to-maturity investments, and what disclosures are required upon the sale or transfer of their held-to-maturity securities. Cascade Company should have a better understanding of how these investments are accounted for.

References

FASB ASC, Section 320-10-20. Readily Determinable Fair Value. Retrieved from

https://asc.fasb.org/glossarysection&trid=2196938&id=SL2285127-111557 FASB ASC, Section 320-10-25-14. Sale After a Substantial Portion of Principal Is Collected.

Retrieved from

https://asc.fasb.org/viewpage?ovcmd=goto&codification_text=320-10-25&codification_submit=GO+TO

FASB ASC, Section 320-10-35-34. Equity Securities—If the Impairment Is Other Than

Temporary, Recognize an Impairment Loss Equal to the Difference between the Investment’s Cost Basis and Its Fair Value. Retrieved from

https://asc.fasb.org/section&trid=2196945&search_marker=searchresult&query=YWNjb3VudGluZyBmb3IgYSBzZWN1cml0eSBpbXBhaXJtZW50

FASB ASC, Section 320-10-35-34D. Debt Securities: Determination of the Amount of an

Other-Than-Temporary Impairment Recognized in Earnings and Other Comprehensive Income. Retrieved from

https://asc.fasb.org/section&trid=2196945&search_marker=searchresult&query=YWNjb3VudGluZyBmb3IgYSBzZWN1cml0eSBpbXBhaXJtZW50

FASB ASC, Section 320-10-50-10. Sales, Transfers, and Related Matters That Occurred during

the Period. Retrieved from

https://asc.fasb.org/section&trid=2196954&search_marker=searchresult&query=ZGlzY2xvc3VyZXMgZnJvbSBzYWxlIG9mIGhlbGQtdG8tbWF0dXJpdHkgc2VjdXJpdGllcw==