Other-than-temporary impairment (OTTI) Essay

IntroductionO.T.T. Incorporated, principally engaged in the manufacture and sale of clothing, has six investitures remaining in the departments portfolio as of declination 31. According to ASC, this memo analyzes whether any of its investments are other-than- temp impaired, and determines the amount of the scathe.Facts enthronization 1 Happy bare-ass category & Co.OTT purchased 11 look ats of Happy New Year & Co. stock on at $20 a share on Jan. 3, 20X1, and the damage dropped to $15 in March and remained steady till Dec. 31, 20X1. OTT care does not believe the decline in set to be permanent and has asserted that it does not intend to bewray this investment in the future.Investment 2 Beary BearyOTT held notes of Beary Beary with an amortized cost of $95 and a fair quantify of $88 on Dec. 31, 20X1. OTTs investment committee established a policy requiring the sale of this warranter when the fair value declines below $90.Investment 3 Buy-A-Lot fellowshipOTT held bonds of Buy-A-Lot Company with an amortized cost of $ blow and a fair value of $88 as of December 31, 20X1. The companys credit 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 going through a restructuring because it was significantly affected by a severe quake in April 20X1. OTT does not believe that the restructuring exit ultimately be successful.Investment 6 ChatterboxOTT holds a debt security issued by Chatterbox with an amorti zed 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 sake 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(prenominal) 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.DiscussionInvestment 1Happy New Year & Co.ASC 323-10-35-32 A loss in value of an investment that is other than a temporary decline shall be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an net income 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 loss shall be recognized in wampum equal to the entire difference between the investments cost and its fair value at the balance sheet date of the accounting system period 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 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 IncorporatedASC 320-10-35-34 The fair value of the investment would then become the new amortized cost buttocks 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 ToysASC 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 been purchased on the measurement date of theother-than-temporary impairment at an amortized cost instauration 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 composed 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 bel ieve 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 ChatterboxAlternative 1SAB 320-10-35-34B If an entity intends to sell the security or more likely than not 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 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. Alternative 2SAB 320-10-35-34C If an entity does not intend to sell the security and it is not mor e 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 alternating(a) 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).