FROM: Xiaoqian Kang
DATE: Dec. 31, 20X1
SUBJECT: Determine the amount of other-than-temporary impairment (OTTI)
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.
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 …show more content…
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
SAB 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 investment’s 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 investment’s amortized cost basis ($100) and its fair value ($90), which is $10.
SAB 320-10-35-34C: “If an entity does not intend to sell the security and it is not more