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Case 14-09 O.T.T. Incorporated Financial Instruments ? Other-Than-Temporary Impairment




Question;Case 14-09;O.T.T.;Incorporated;Financial;Instruments ? Other-Than-Temporary Impairment;O.T.T.;Incorporated (?the Company? or ?OTT?), incorporated in Delaware, is principally;engaged in the manufacture and sale of clothing. The Company has three lines of;business: (1) outerwear, (2) t-shirts, and (3) tank tops. OTT was extremely;successful in its early years when it partnered with colleges and universities;to create outerwear, t-shirts, and tank tops for athletes, students, and;alumni. This partnership also enabled OTT to hire a group of college graduates;with a proven track record and a passion for investing in the stock market.;Together, OTT and these graduates created a new investment department in 20X1.;OTT management set aside a portion of the previous years? profits for the;investment department to invest in equity and debt securities for the Company.;OTT has six investments remaining in the department?s portfolio as of December;31, 20X1. OTT classified all equity and debt securities as either available for;sale or held to maturity under the Company?s investment policy.;The;accounting department is preparing financial statements for the fiscal year;ended December 31, 20X1, and the auditors have asked OTT whether any of its;investments are other-than-temporarily impaired. The CFO of OTT needs to;present the investment department?s financial results at the next operating;committee meeting so the committee can decide whether to continue the;investment program and if so, determine the amount of funds that should be;allocated. In looking at the accounting records provided by the accounting;department, the CFO is beginning to question the investment department?s;expertise because all investments have declined in value relative to each;investment?s original purchase price.;The;accounting manager compiled the following information about each of the;investments in order to determine whether the investment is;other-than-temporarily impaired as of December 31, 20X1.;? OTT;purchased 11 shares of Happy New Year & Co. stock on January 3, 20X1, at;$20 a share to celebrate the new year and classified its investment as;available for sale. In March, the share price dropped to $15, and from April;through November the price remained steady between $14.75 and $15.25 per share.;On December 31, 20X1, the price was $15. OTT management does not believe the;decline in price to be permanent and has asserted that it does not intend to;sell this investment in the future.;? On;November 11, 20X1, OTT purchased notes of Beary Beary. As of December 31, 20X1;the amortized cost of the debt security is $95 and the fair value is $88.;Although OTT?s investment committee established a policy requiring the sale of;this security when the fair value declines below $90, OTT still held the investment;on December 31, 20X1.;?;On September 20, 20X1;OTT purchased bonds issued by Buy-A-Lot Company with an amortized cost of $100;and a fair value of $88 as of December 31, 20X1. In December, S&P upgraded;the credit rating of Buy-A-Lot Company from BBB;Copyright;2012 Deloitte Development LLC;All Rights;Reserved.;Case;14-09c: O.T.T. Incorporated: Financial Instruments ? Other-Than-Temporary;Impairment Case Page 2;to;BBB+. Management has asserted it does not intend to sell this investment in the;future.;? On;March 25, 20X1, OTT bought 50 shares of March Madness Incorporated stock at;$100 a share, classifying its investment as available for sale. In August, the;price of the stock decreased to $70, and from September through November, the;stock price fluctuated between $65 and $75. As of December 31, 20X1, the price;of the stock was $72. On January 31, 20X2, the date the Company?s financial;statements are issued, the price of the stock went up to $75.;? OTT;purchased bonds issued by Tohoku Toys on February 9, 20X1. The bonds have an;amortized cost of $25 and a fair value of $5 as of December 31, 20X1. Tohoku;Toys is going through a restructuring because it was significantly affected by;a severe earthquake in April 20X1. OTT does not believe that the restructuring;will ultimately be successful.;? OTT;holds a debt security issued by Chatterbox with an amortized cost of $100 and a;fair value of $90 as of December 31, 20X1. The present value of the cash flows;OTT expects to receive, taking into consideration the credit quality of;Chatterbox, discounted at the security?s original effective interest rate is;$92 as of December 31, 20X1. OTT intends to sell this security.;Required;For;the following investments, determine if OTT should record an;other-than-temporary impairment as of December 31, 20X1, and if so, for;what amount;?;Happy New Year & Co.;?;Beary Beary.;?;Buy-A-Lot Company.;Assuming;OTT has determined its investment in March Madness Incorporated stock is;other-than-temporarily impaired, how much should be recorded as an;impairment charge as of December 31, 20X1?;Assume the same facts as in 2;above, but that OTT has not yet determined whether an impairment exists or;the amount of any possible impairment. For March Madness Incorporated;would OTT still conclude that the investment is other-than-temporarily;impaired, and would the impairment charge as of December 31, 20X1, be;different if the stock price at issuance of the financial statements;(i.e., as of January 31, 20X2) was $95 and not $75?;For;Tohoku Toys, determine if OTT should record an other-than-temporary;impairment as of December 31, 20X1.;For Chatterbox, what amount;should be recorded as the other-than-temporary impairment as of December;31, 20X1? Does the answer change if OTT does not intend to sell the;security and it is not more likely than not that it will be required to;sell the security?


Paper#52508 | Written in 18-Jul-2015

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