Accounting Research and write a Memo for "Fair Value measurement”

Accounting Issues Memorandum and Presentation

Fair Value Measurements

Background

Arsenio Investment, Inc. is a private company that invests in various financial and non-financial assets for its shareholders. Assets are measured at fair value at each reporting date. The chief investment officer (CIO) of the company has finalized the fair values for a number of investments as of December 31, 2020. They are as follows:

Marketable equity securities

Arsenio has an investment in 100,000 shares of common stock of a large public company whose stock is traded on the NYSE. The stock is currently valued in the accounting records at $25.00 per share ($2.5 million), which was the value at the last measurement date of September 30, 2020. The CIO is proposing to measure the fair value of the common stock at the bid price for the stock at the close of business on the measurement date of December 31, 2020, which is $27.50 per share. This valuation approach is consistent with what has been used in the past three years by management. Thus, the fair value is $2.75 million at year-end.

Private equity securities

Arsenio has an investment in 100,000 shares of common stock of a private company. There are no market quotes with respect to the fair value of the common stock; however, the private company’s operations, size and performance are similar to a company whose stock is traded on the NASDAQ. The CIO has taken some of the similar company’s market metrics, such as the price/earnings ratio of the common stock, a discounted earnings calculation and a few others, and has adjusted these metrics to reflect performance that he believes is better and more accurate of the metrics with which to value the private company and related investment. However, these revised metrics do not agree with the metrics of the similar public company or other companies in this industry.

Land

Arsenio has an investment in a 10-acre parcel of land that is located near downtown Los Angeles that has just been remediated from an old oil spill. The carrying value of the land at September 30, 2020, was $1 million per acre, or $10 million, and is the equivalent of the cost of the land plus the costs to remediate the oil spill. The surrounding area consists of single-story warehouse facilities, which is consistent with the zoning of the area. The CIO believes that the land can be used to construct either a commercial warehouse or industrial manufacturing facility; the later requiring rezoning from the city. Recent similar sales of land within the area have been approximately $800,000 per acre. The CIO is valuing the land at $1 million per acre as he believes that with a rezoning and clever marketing, the land will sell for $1 million per acre in the future. Further, he says that management has the intent and ability to hold the land for a reasonable period of time and then sell it for $10 million. He thinks this is the highest and best use of the land.

Automobiles

Arsenio owns a group of 10 automobiles, previously used by the senior executives of Arsenio, that are currently for sale. The automobiles are currently carried at $15,000 per auto for a total of $150,000. They have low mileage and could be sold in either the retail market or the dealer market. The dealer market is an active market and management could access that market the next day. Management has been told by a reputable dealer that the autos could be sold for approximately $13,000 per auto. The retail market is slightly harder to access and would take some time to dispose of the automobiles. Used car pricing guides put the sales prices of the autos at approximately $15,500. The CIO is proposing to measure the fair value of the automobiles at December 31, 2020, at $15,000, the current carrying amount, as he believes that through orderly sales within the next two to three months the automobiles could be sold in the retail market for at least $15,000 per auto.

The Setting

You are the Manager on the 2020 audit of Arsenio and are examining the above accounting issues that have subjective aspects. The audit partner has asked you to analyze these issues and prepare a comprehensive accounting issues memorandum, pages depend on your research but must be single-spaced to assess managements valuations and to support your position. Also, the partner has asked you to present your work to the Controller and CFO of Arsenio, each of whom has limited accounting knowledge in this area. The presentation is approx…..and should include approx. 8-10 Powerpoint slides. Use the ASC (US-GAAP) and, in addition, you must include 2 references to accounting firm literature.

Required

1. For each of the above investments, evaluate the CIO’s valuation approach.

· If you agree, state your reasons. Also, determine if there are other valuation approaches that could be used.

· If you disagree, state your reasons and suggest either a different approach or how you might change the current approach and what, if any, adjustments should be made to the valuation.

2. For each of the above investments, determine the classification according to the fair value hierarchy.

3. The reference must be FASB codifications, US-GAAP.

4. Please don’t massage the words in your memo, direct to the point and support your discussion.

5. Two references for accounting firm literature.