Your client, Cascade Company, is planning to invest some of its excess cash in 5-year revenue bonds issued by the county and in the stock of one of its suppliers, Teton Co. Teton’s shares trade on the over-the-counter market. The company would like you to conduct some research on the accounting for these investments.
Use the NU FASB Codification to log in and prepare responses to the following. Provide Codification references for your answers.
Instructions
Answer each of the following questions:
Since the Teton shares do not trade on one of the large stock markets, Cascade argues that the fair value of this investment is not readily available. According to the authoritative literature, when is the fair value of a security “readily determinable”?
To avoid volatility in their financial statements due to fair value adjustments, Cascade debated whether the bond investment could be classified as held-to-maturity; Cascade is pretty sure it will hold the bonds for 5 years. How close to maturity could Cascade sell an investment and still classify it as held-to-maturity?
What disclosure must be made for any transfer sale from securities classified as held-to-maturity.
Rewrite the below:
When is the fair value of a security “readily determinable”?
Codification Reference: ASC 321-10-20.
As per the Codification, an equity security’s fair value is deemed “readily determinable” if it is listed on a national exchange (such as NYSE or Nasdaq) or traded on an over-the-counter market for published market quotations. It is also considered readily determinable if it is an investment in a mutual fund or if the issuer publicly reports it in any market regulated by the Securities and Exchange Commission or a similar authority in a foreign jurisdiction.
How close to maturity could Cascade sell an investment and still classify it as held-to-maturity?
Codification Reference: ASC 320-10-25-6.
A debt security can only be classified as held-to-maturity if the entity that reports it has the intention and ability to hold it until maturity. However, there are exceptions where a security may still be classified as held-to-maturity even if sold before its maturity date. These exceptions include the following scenarios: if a security is sold so close to its maturity date (for example, within three months) that the interest rate risk is significantly reduced; if the sale is due to an isolated, non-recurring, and unusual event that could not have been reasonably anticipated; and if the sale is related to a significant deterioration in the issuer’s creditworthiness.
What disclosure must be made for any transfer sale from securities classified as held-to-maturity?
Codification Reference: ASC 320-10-50-6.
When a transfer or sale of held-to-maturity securities occurs, the entity must provide the relevant information as part of its disclosure. This information must include the nature and reason for the transfer or sale, the income statement impact of the sale (such as any gain or loss), and the fair value and carrying amount of the transferred or sold securities as of the date of the transfer or sale. By providing this information, the entity can ensure transparency and clarity in its financial reporting and enable stakeholders to make informed decisions about its financial position and performance.
These references and explanations should provide Cascade Company with information regarding their investments in 5-year revenue bonds and Teton Co. stock.
