Case I
Astro Incorporated Financial Investments
Astro Incorporated (“the Company” or “Astro”), 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. Astro 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 Astro to hire a group of college graduates with a proven track record and a passion for investing in the stock market. Together, Astro and these graduates created a new investment department in 2014. Astro management set aside a portion of the previous years’ profits for the investment department to invest in equity and debt securities for the Company. Astro has six investments remaining in the department’s portfolio as of December 31, 2014. Astro 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, 2014, and the auditors have asked Astro whether any of its investments are other-than-temporarily impaired. The CFO of Astro 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, 2014.
1. Astro purchased 11 shares of Happy New Year & Co. stock on January 3, 2014, 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, 2014, the price was $15. Astro management does not believe the decline in price to be permanent and has asserted that it does not intend to sell this investment in
2. On November 11, 2014, Astro purchased notes of Beary Beary. As of December 31, 2014, the amortized cost of the debt security is $95 and the fair value is $88. Although Astro’s investment committee established a policy requiring the sale of this security when the fair value declines below $90, Astro still held the investment on December 31, 2014.
3. On September 20, 2014, Astro purchased bonds issued by Buy-A-Lot Company with an amortized cost of $100 and a fair value of $88 as of December 31, 2014. In December, S&P upgraded the credit rating of Buy-A-Lot Company from BBB to BBB+. Management has asserted it does not intend to sell this investment in the future.
4. On March 25, 2014, Astro 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, 2014, the price of the stock was $72. On January 31, 2015, the date the Company’s financial statements are issued, the price of the stock went up to $75.
5. Astro purchased bonds issued by Tohoku Toys on February 9, 2014. The bonds have an amortized cost of $25 and a fair value of $5 as of December 31, 2014. Tohoku Toys is going through a restructuring because it was significantly affected by a severe earthquake in April 2014. Astro does not believe that the restructuring will ultimately be successful.
6. Astro holds a debt security issued by Chatterbox with an amortized cost of $100 and a fair value of $90 as of December 31, 2014. The present value of the cash flows Astro 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, 2014. Astro intends to sell this security.
Required:
A For the following investments, determine if Astro should record an other-than- temporary impairment as of December 31, 2014, and if so, for what amount:
a. Happy New Year & Co.
b. Beary Beary.
c. Buy-A-Lot Company.
B. Assuming Astro 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, 2014? (show calculation)
C. Assume the same facts as in 2 above, but that Astro has not yet determined whether an impairment exists or the amount of any possible impairment. For March Madness Incorporated, would Astro still conclude that the investment is other-than-temporarily impaired, and would the impairment charge as of December 31, 2014, be different if the stock price at issuance of the financial statements (i.e., as of January 31, 2015) was $95 and not $75?
D. For Tohoku Toys, determine if Astro should record an other-thantemporary impairment as of December 31, 2014.
E. For Chatterbox, what amount should be recorded as the other-than-temporary impairment as of December 31, 2014? Does the answer change if Astro does not intend to sell the security and it is not more likely than not that it will be required to sell the security?
A. Happy New Year& Co. stock: as per the Accounting Standards Codification 320, when the decision of whether the equity security is temporarily impaired or not, the following has to be taken into account:
Keeping in mind the above stated points, the shares of the company have a fair value that is lower than what they were purchased for and the fall has been in place for quite some time now. Also, there is no specific reason for the fall, therefore, the investment will be treated as to be other than temporarily impaired.
Beary Bear debt security: as per the ASC 320, any debt security whose fair value is lesser than its amortized cost is said to have been impaired. For the entity to impair its investment, it has to consider whether it has the intention to sell the asset. For determine that, it has to consider all the available evidence such as the following:
In case the intention of the entity to sell does not exist, then the factors like the requiring the entity to sell the security and the probability of the factors that occur during the anticipated recovery period will be taken into account. If the entity does not sell the security, then it is more likely that it will be required to sell an impaired debt security, then other than temporary impairment exists and the amortized to be impaired will be Fair value minus the amortized value of the debt security. Therefore the notes of Beary should have been sold but were not, therefore the fall in the value will be treated as the other than temporary impairment.
(IAS 320, 2015)
Buy a lot company: (FASB 325) Debt Security is defined as the security that represents the creditor relationship with the entity. And will include all the following:
(Law resource, 2015)
As per the ASC 320, any debt security whose fair value is lesser than its amortized cost is said to have been impaired. For the entity to impair its investment, it has to consider whether it has the intention to sell the asset. For determine that, it has to consider all the available evidence such as the following:
In case the intention of the entity to sell does not exist, then the factors like the requiring the entity to sell the security and the probability of the factors that occur during the anticipated recovery period will be taken into account. If the entity does not sell the security, then it is more likely that it will be required to sell an impaired debt security, then other than temporary impairment exists equal to the difference between the fair value and the amortized cost of the debt security.
Therefore the bonds of Buy a lothave been asserted to as not being held for investment, therefore the fall in the value will be treated as the other than temporary impairment.
B. The following is the calculation of the impairment charge:
$(100-72)50 = $1,400
This is in light of the FASB 325, In case the intention of the entity to sell does not exist, then the factors like the requiring the entity to sell the security and the probability of the factors that occur during the anticipated recovery period will be taken into account. If the entity does not sell the security, then it is more likely that it will be required to sell an impaired debt security, then other than temporary impairment exists equal to the difference between the fair value and the amortized cost of the debt security.
C. The revaluation is done as on the date of the balance sheet which is December 31 and even if the price of the stock has risen after it but fallen as on the next balance sheet date, there is an impairment loss.
Hence, the calculation will be as under:
$(100-72)50 = $1,400
D. As per the Accounting Standards Codification 320, when the decision of whether the equity security is temporarily impaired or not, the following has to be taken into account:
Keeping in mind the above stated points, the price of bonds of Tohoku Toys fell due to the natural disaster that took place. Therefore, the investment will be treated as being temporarily impaired.
E. The amount to be recorded must be $(100-90).
In case, the business decides to sell the securityor it is more likely than not that it will be forced to do so before, then there will be a recovery of the amortized cost of the security and the loss of the earnings must be recognised. But in case, the business does not intend to sell the security and it is more likely than not that it will not have to do so, then a separate impairment will have to be made for the credit loss. Once the impairment is done, the amount becomes the new amortized cost ($90) and then no upward recording in the price can be done.
Hence, the security can in no case be recorded as impairment at $92.
The amount of $(92-90) can only be treated as the interest income.
(Accounting tools, 2015)
References:
Accountingtools.com, (2015). The other-than-temporary impairment concept – Questions & Answers – Accounting Tools. [Online] Available at: https://www.accountingtools.com/questions-and-answers/the-other-than-temporary-impairment-concept.html [Accessed 2 Mar. 2015].
Law.resource.org, (2015). 325 Investments “Other. [Online] Available at: https://law.resource.org/pub/us/code/bean/fasb.html/fasb.325.2011.html [Accessed 2 Mar. 2015].
www.iasplus.com, (2015). IAS 320. [Online] Available at: https://www.iasplus.com/en/publications/us/financial-reporting-alerts/2013/fra-13- [Accessed 2 Mar. 2015].
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