TO: O.T.T. Incorporated
FROM: Xiaoqian Kang
DATE: Dec. 31, 20X1
SUBJECT: Determine the amount of other-than-temporary impairment (OTTI)
Introduction
O.T.T. Incorporated, principally engaged in the manufacture and sale of clothing, has six investments remaining in the department’s portfolio as of December 31. According to ASC, this memo analyzes whether any of its investments are other-than-temporary impaired, and determines the amount of the impairment.
Facts
Investment 1 -- Happy New Year & Co.
OTT purchased 11 shares of Happy New Year & Co. stock on at $20 a share
on Jan. 3, 20X1, and the price dropped to $15 in March and remained steady till Dec. 31, 20X1. OTT management does not believe the decline in price to be
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Investment 3 – Buy-A-Lot Company
ASC 320-10-35-33F: “Changes in the quality of the credit enhancement should be considered when estimating whether a credit loss exists and the period over which the debt security is expected to recover.”
Although the fair value of the investment was lower than the amortized cost, the credit rating had been upgraded from BBB to BBB+, and the investment does not intend to be sold. These evidence show that the bond is expected to recover, so no other-than-temporary impairment has occurred.
Investment 4 – March Madness Incorporated
ASC 320-10-35-34: “The fair value of the investment would then become the new amortized cost basis of the investment and shall not be adjusted for subsequent recoveries in fair value.”
Based on ASC 320-10-35-34 I mentioned above, the other-than-temporary impairment should be recoded as $28 ($100-$72) as of December 31, 20X1. On January 31, 20X2, when the price of the stock went up to $75, the other-than-temporary impairment should be recoded as $25 ($100-$75). If the share price was $95 instead of $75 on January 31, 20X2, I think no other-than-temporary impairment needs to be recorded, because there is no material decrease occurred.
Investment 5 -- Tohoku Toys
ASC 320-10-35-35: “In periods after the recognition of an other-than-temporary impairment loss for debt securities, an entity shall account for the other-than-temporarily impaired debt security as if the debt security had
The impairment loss is the excess of the asset group’s carrying value over the asset group’s fair value. ASC 820 states that fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.” The fair value of the asset group consists of the cruise ship, which has a fair value of $3 million, and the net working capital of $.1 million. The difference between the asset group’s fair value of $3.1 million and the carrying value of $4.7 million is an impairment loss $1.6 million, which should be recorded at the end of the current period, December 31, 2010.
FASB. (2014). _Summary of statement no. 144._ Accounting for the Impairment or Disposal of Long-Lived Assets (Issued 8/01). Retrieved May 26, 2014 from ht
1) In the case, a significant change in the legal environment. We need to perform a recoverability test. According to ASC 360-10-35-21 “events or changes in circumstances indicate that the book value of the asset or asset group may not be recoverable. (c) A significant adverse in legal factors or business climate” The carrying amount of net assets is 1,400,000, more than its fair value, which is 1,300,000 (due to the revaluation of PP&E). There is impairment loss on total assets under GAAP. We first indicate if there is a loss on goodwill. ASC 360-35-26 states” Goodwill shall be included in an asset group to be tested for impairment under this Subtopic only if the asset group is or includes a reporting unit. Goodwill shall not be included in a lower-level asset group that includes only part of a reporting unit. Estimates of future cash flows used to test that lower-level asset group for recoverability
The Beary Beary investment should recognize an other-than-temporary impairment. O.T.T. Incorporated established intent to sell by creating a policy that required the sale of the security when the fair value became less than the amortized cost. As of December 31, 20X1 the amortized cost of the debt security ($95) and the fair value ($88). And the company does not expect to recover the entire amortized cost basis of the security. O.T.T. Incorporated should record an impairment loss of $7 ($95 - $88).
Case 10-2 Ida’s Impairment Ida Inc. (Ida) is a manufacturing company with operations in the United States and Spain. As a U.S. subsidiary of a U.K. entity, Ida prepares its financial statements in accordance with (1) U.S. GAAP for reporting to its U.S.-based lender and (2) IFRSs in reporting to its parent. U.S. Operations In addition to other assets, Ida owns and operates a commercial building in the United States that is carried at its cost less any accumulated depreciation and any accumulated impairment losses. As of December 31, 2010, the building represents: A cash-generating unit (CGU) under IFRSs. A long-lived asset classified as held and used under U.S. GAAP. In December 2010, one of Ida’s competitors sold its commercial
An impairment loss is equal to the excess of the carrying amount over the fair value of the asset. Thus, once it is determined that carrying value will not be recovered, an impairment loss must be recognized”. For purposes of testing for recoverability and measuring an impairment loss, individual long-lived assets should be grouped with other assets forming the lowest level for which identifiable cash flows are largely independent of those of the entity's other assets. Note, though, that, if an impairment loss is recognized, it should be applied only to the long-lived assets in the group that are covered by FASB ASC 360-10 ; thus, other assets in the group are not affected but should, if necessary, be adjusted for impairment in accordance with other applicable GAAP. As defined in FASB ASC 350-10: “Goodwill should be part of an asset group to be tested for impairment only if the group is itself a “reporting unit” or includes such a unit”. Note that when we want to evaluate or compute the implied goodwill or test goodwill impairment, we should include the combined net assets of Plant 3 which includes property, plant and equipment. 8A-Impairment or Disposal of Long-Lived Assets (WG&L) provided relevant parts that: “impairment occurs when the carrying amount of asset is not recoverable and a write-off is needed”. The section also mentioned about various events and changes in circumstances might lead to an impairment
the assessment of recoverability of long-lived assets (property, plant and equipment; goodwill; and identified intangibles), which impacts gross margin or operating expenses when we record asset impairments or accelerate their depreciation or amortization;
To be not recoverable the carrying amount has to be larger than the sum of the expected undiscounted cash flows and disposition of the asset. As of January 1, 2015 The Wilma has a carrying cost of $4,875,000 (cost of $6,500,000 minus 10 year depreciation of 1,625,000). The lease for 2015-2024 will generate an undiscounted cash flow of $2,400,000. With the over abundance of commercial warehouse space The Wilma only has a 50% chance of renewing the lease for another 10 years (2025-2034). Therefore the total undiscounted cash flow would be $3,600,000. The carrying cost of The Wilma is larger than the undiscounted cash flow calculated, making the carrying amount of The Wilma not recoverable. The impairment loss will be the amount that the carrying amount exceeds the fair value by. The discounted fair value of The Wilma is $2,543,176.80; therefore the impairment loss to be recognized is $2,331,823.20 (carrying amount of $4,875,000 minus the fair value of $2,543,176.80) (FASB, 2015, ASC para.
ASC 350-20-35-8A If the carrying amount of a reporting unit is zero or negative, the second step of the impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists.
In this case, just this quarter the fair value of the securities decreased enough to be below the cost, so the extent to which the market value has been less than its costs its low. Also, the client asserts that he has the ability and intend to hold the securities, until their value recovers. Because of those two factors, and the lack of evidence that states otherwise, in this period, it’s not reasonable to state that the impairment is “other than temporary”.
14. An investor adjusts the investment account for the amortization of any difference between cost and book value under the
After determining that an investment is impaired, Step 2 requires an entity to evaluate whether the impairment is temporary or other-than-temporary. The process for evaluating impairment is different for equity securities versus debt securities. With regards to equity securities and according to ASC 320-10-35-33, if entity intends to
The purpose of this statement is that several items that affect net asset may not be apparent from a review of the statement of operations. For example, an addition to endowments under the deferral method of accounting would not appear in the statement of operations but would impact the ending net asset balance. The difference in the arrangement of this statement is that the main section denotes discrepancies in unrestricted net assets, temporarily restricted net assets and permanently restricted net assets.
These assets are stated at cost less accumulated depreciation and impairment loss (if any) except
The Allowance for Loan Losses (ALL) represents an estimate of losses that have been incurred on loans in the portfolio that are considered to be “impaired” as of the balance sheet date, based in part of review of individual loans and in party on high-level analytics of groups of loans sharing common risk characteristics (“0081_REP_Sacher_interior.indd-243_Sacher_Loan_Losses.pdf,” n.d.).