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Camelback Investment Company (CIC) is a private company




Question;Question 1BackgroundCamelback Investment Company (CIC) is a private company that invests in variousfinancial and non-financial assets for its shareholders. Assets are measured at fair valueat each reporting date so that the shareholders will know what their underlying shares areworth, which facilitates sales of the limited number of shares.It is early January 2011, and as the junior accountant at CIC, you have been asked by thechief financial officer (CFO) to work with the chief investment officer (CIO) to evaluateand determine the propriety of fair values that the CIO is proposing for a number ofinvestments as of December 31, 2010. In that regard, the CFO asks you to challenge thevaluation methodologies that the CIO has assigned to the various investments to ensurethey are in compliance with ASU 820 and IFRS 13.The investments are as follows:Marketable equity securitiesCIC has an investment in 100,000 shares of common stock of a large public companywhose stock is traded on the NYSE. The stock is currently valued in the accountingrecords at $25.00 per share ($2.5 million), which was the value at the last measurementdate of September 30, 2010. The CIO is proposing to measure the fair value of thecommon stock at the bid price for the stock at the close of business on the measurementdate of December 31, 2010, which is $27.50 per share. This valuation approach isconsistent with what has been used in the past three years by management. Thus, the fairvalue is $2.75 million at year-end.Private equity securitiesCIC has an investment in 100,000 shares of common stock of a private company. Thereare no market quotes with respect to the fair value of the common stock, however, theprivate company?s operations, size and performance are similar to a company whosestock is traded on the NASDAQ. The CIO has taken some of the similar company?smarket metrics, such as the price/earnings ratio of the common stock, a discountedearnings calculation and a few others, and has adjusted these metrics to reflectperformance that he believes is better and more accurate of the metrics with which tovalue the private company and related investment. However, these revised metrics do notagree with the metrics of the similar public company or other companies in this industry.LandCIC has an investment in a 10-acre parcel of land that is located near downtown LosAngeles that has just been remediated from an old oil spill. The carrying value of theland at September 30, 2010, was $1 million per acre, or $10 million, and is the equivalentof the cost of the land plus the costs to remediate the oil spill. The surrounding areaconsists of single-story warehouse facilities, which is consistent with the zoning of thearea. The CIO believes that the land can be used to construct either a commercialwarehouse or industrial manufacturing facility, the later requiring rezoning from the city.1Recent 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 andclever marketing, the land will sell for $1 million per acre in the future. Further, he saysthat management has the intent and ability to hold the land for a reasonable period of timeand then sell it for $10 million. He thinks this is the highest and best use of the land.AutomobilesCIC owns a group of 10 automobiles, previously used by the senior executives of CIC,that are currently for sale. The automobiles are currently carried at $15,000 per auto for atotal of $150,000. They have low mileage and could be sold in either the retail market orthe dealer market. The dealer market is an active market and management could accessthat market the next day. Management has been told by a reputable dealer that the autoscould be sold for approximately $13,000 per auto. The retail market is slightly harder toaccess and would take some time to dispose of the automobiles. Used car pricing guidesput the sales prices of the autos at approximately $15,500. The CIO is proposing tomeasure the fair value of the automobiles at December 31, 2010, at $15,000, the currentcarrying amount, as he believes that through orderly sales within the next two to threemonths the automobiles could be sold in the retail market for at least $15,000 per auto.Real estateCIC has an investment in a condominium project that was completed on September 30,2010. The carrying amount of the condominium at that date was $25 million andreflected the cumulative investments that CIC made to the developer. ThroughDecember 31, 2010, there have not been any sales of any of the condominium units andthe developer has just declared bankruptcy.CIC has taken over the project, hired a management company to oversee the building anda marketing/sales company to sell the individual units. The CIO hired Ace Number One(Ace) real estate valuation and appraisal experts to measure the fair value of the projectas of December 31, 2010. Ace ended up valuing the condominium project at $18 millionand their report considered a combined approach of comparable sales figures forcomparable condominium units as well as a discounted cash flow approach, adjusted forthe current economic conditions.Ace acknowledged their understanding of the definition of fair value under ASC 820 asan exit price and presented their impeccable qualifications. The CIO believes theirvaluation is overly conservative and that given a reasonable period of time, 18 months,the marketing/sales company will be able to sell all the units at only a 10% haircut to thetotal amount invested in the project. He is therefore proposing to value the investment inthe condominium project at $22.5 million ($25 million at 90%).Required:1-For each of the above investments, determine if you agree or disagree with 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, adjustements should be made to the valuation. a. For each of the above investments, in column (b) determine the classificationaccording to the fair value hierarchy.2- For each of the above investments, determine the classification according to the fair value hierarchy.


Paper#49584 | Written in 18-Jul-2015

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