Accounting Theory Case Essay

918 Words Oct 31st, 2014 4 Pages
Case 10-7 Impaired Abilities Scenario A On 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 evaluated this decline in fair value to determine whether it is other than temporary and concluded that the decline is temporary. Company A provided the auditors with a brief memo documenting its conclusion as of the period end as follows: M EM O R AN D U M

Company A Files Controller March 31, 2010 Assessment of Impairment

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Company X forecasts recovery by April 2011. Company B’s share price has experienced temporary declines in the past. Company B has a high credit rating.

Company X has provided a written representation to its auditors that as of December 31, 2010, it has the positive intent and ability to hold these impaired securities for a period sufficient to allow for the anticipated recovery in market value. The 2010 financial statements were issued on March 1, 2011. On March 15, 2011, B announced in a press release a plan to dispose of a major segment of its business and restructure the remaining operations to allow the company to leave the retail market and concentrate solely on the wholesale market. The press release further (1) states that the reorganization will result in an initial loss of revenue and significant initial costs but (2) forecasts a return to profitability within a reasonable period. Immediately after reading the press release, X sold the securities and realized a loss on the sale. Required: • You have been asked by the engagement partner to (1) react to both

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