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ACC- Case 10-7 Impaired Abilities




Question;Case 10-7Impaired AbilitiesScenario AOn 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 has evaluated this decline in fair value to determine whether it is other than temporary and has concluded that the decline is temporary.Company A has provided the auditors with a brief memo documenting its conclusion as of the period-end as follows:M E M O R A N D U MTO:Company A FilesFROM:ControllerDATE:March 31, 2010SUBJECT:Assessment of ImpairmentAs of March 31, 2010, management has reviewed the investment portfolio and has identified the following investments with a fair value below amortized cost:Investment AcquisitionDate Amortized Cost Fair Value Unrealized (Loss) Duration of ImpairmentMunicipal Bonds 9/30/08 $8,500,000 $7,500,000 ($1,000,000) 18 monthsCorporate Bonds 7/30/07 $8,200,000 $6,800,00 ($1,400,000) 32 monthsWe have determined that the debt securities are not other-than-temporarily impaired on the basis of the following facts:?We do not intend to sell the debt securities at March 31, 2010.?We have determined that it is not more-likely-than-not that we will be required to sell the debt securities before recovery of their amortized cost bases.?The decline is attributable solely to adverse interest rate movements.?The principal and interest payments have been made as scheduled, and there is no evidence that the debtor will not continue to make them as scheduled. That is, we expect to fully recover the amortized cost bases of these securities.Accordingly, we will not record an impairment loss in earningsIn addition, A has provided a written representation to its auditors that as of March 31, 2010, it does not intend to sell the debt securities and it is not more-likely-than-not that it will be required to sell the debt securities before recovery of their amortized cost bases.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 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


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