Other-than-temporary impairment (OTTI) Essay

IntroductionO.T.T. Incorporated, principally engaged in the manufacture and sale of clothing, has six enthronizations remaining in the departments portfolio as of declination 31. According to ASC, this memo analyzes whether whatsoever of its coronations are other-than- makeshift impaired, and determines the numerate of the terms.Facts enthronisation 1 Happy rising Year & Co.OTT purchased 11 deals of Happy New Year & Co. source on at $20 a share on Jan. 3, 20X1, and the toll dropped to $15 in March and remained steady bank Dec. 31, 20X1. OTT management does non believe the sort out in price to be permanent and has asserted that it does non intend to snitch this investing in the future. investment 2 Beary BearyOTT held notes of Beary Beary with an amortized toll of $95 and a passably abide by of $88 on Dec. 31, 20X1. OTTs investment committee established a policy requiring the sale of this security when the fair apprize declines below $90. enthronement 3 Buy-A-L ot CompanyOTT held bonds of Buy-A-Lot Company with an amortized cost of $100 and a fair value of $88 as of celestial latitude 31, 20X1. The gilds confidence rating upgraded from BBB to BBB+ that management has asserted it does not intend to sell this investment. investment 4 March Madness IncorporatedOn March 25, 20X1, OTT bought 50 shares of March Madness Incorporated stock at $100 a share, classifying its investment as available for sale. As of December 31, 20X1, the price of the stock was $72. On January 31, 20X2, the date the Companys financial statements are issued, the price of the stock went up to $75.Investment 5 Tohoku ToysOTT held bonds issued by Tohoku Toys with an amortized cost of $25 and a fair value of $5 as of December 31, 20X1. Tohoku Toys is personnel casualty through a restructuring because it was significantly affected by a thoroughgoing(a) earthquake in April 20X1. OTT does not believe that the restructuring entrust ultimately be successful.Investment 6 cotingaOTT 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, discounted at the securitys original effective following rate is $92 as of December 31, 20X1. OTT intends to sell this security.IssuesThe other-than-temporary impairment depends on two issuesWhether the fair value of the investment is less than its cost. The impairment is either temporary or other than temporary depending on other guidance when the fair value is less than its cost. treatmentInvestment 1Happy New Year & Co.ASC 323-10-35-32 A release in value of an investment that is other than a temporary decline shall be recognized. Evidence of a expiration in value mightiness include, but would not necessarily be limited to, absence of an talent to recover the carrying get of the investment or inability of the investee to sustain an moolah capacity that would justify the carrying amount of the investment. ASC 320-10-35-34 If it is determined in Step 2 that the impairment is other than temporary, then an impairment exit shall be recognized in earnings equal to the entire dissimilitude amongst the investments cost and its fair value at the balance mainsheet date of the reporting intent for which the assessment is made. Because the share price had a large decline from $20 to $15 and remained steady around $15 in most of time, it seems the share is absence of an ability to recover the carrying amount of the investment. Therefore, other-than-temporary impairment hasoccurred, and loss of $55 (11*$5) should be recorded.Investment 2 Beary BearyASC 320-10-35-33A If an entity intends to sell the debt security (that is, it has decided to sell the security), an other-than-temporary impairment shall be considered to have occurred. The company intends to sell the investment because the fair value is below $90. Therefore, other-than-temporary impairment has occurred, and loss of $7 ($95-$88) should be recorded.Investment 3 Buy-A-Lot CompanyASC 320-10-35-33F Changes in the shade 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 commence than the amortized cost, the credit rating had been upgraded from BBB to BBB+, and the investment does not intend to be sold. These demo show that the bond is expected to recover, so no other-than-temporary impairment has occurred.Investment 4 March Madness IncorporatedASC 320-10-35-34 The fair value of the investment would then become the unused 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 on that point is no material decrease occurred.Investment 5 Tohoku ToysASC 320-10-35-35 In periods later 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 been purchased on the measurement date of theother-than-temporary impairment at an amortized cost basis equal to the previous amortized cost basis less the other-than-temporary impairment recognized in earnings. For debt securities for which other-than-temporary impairments were recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted in accordance with existing applicable guidance as interest income. Although Tohoku Toys is undergoing a restructuring because of earthquake, OTT does not believe the restructuring will be successful. Based on authoritative literature mentioned above, the other-than-temporary impairment shall be recognized as $20 ($25-$5) when no addition evidence provided.Investment 6 Chatterbox alternating(a) 1SAB 320-10-35-34B If an entity intends to sell the security or more apt(predicate) than not will be required to sell the security before retrieval of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investments amortized cost basis and its fair value at the balance sheet date. Based on the authoritative literature, if OTT intends to sell this security, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investments amortized cost basis ($100) and its fair value ($90), which is $10. Al ternative 2SAB 320-10-35-34C If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be separated into both of the following a. The amount representing the credit loss.b. The amount related to all other factors.Different from substitute 1, 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, the credit loss will be $8 ($100-$92) and other factor loss willbe $2 ($10-$8).