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Case 1

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Background

Our Client, Company A, owns a portfolio of investment-grade, fixed-rate debt securities classified as available for sale. Due to interest rate increases between the date of purchase and March 31, 20X6, a material portion of the portfolio’s Fair Value is below Amortized Cost. Company A has deemed the decline to be temporary. Company A has provided written intent to not sell the debt securities on March 31,20X6 and determined that it is not more-likely-than-not that they will sell the securities before fully recovering the amortized cost bases. Refer to Client Memorandum on file on March 31,20X6. On April 30, 20X6 Company A sold certain of the “temporarily impaired” debt securities in its portfolio and realized a loss on the sale. Through inquires with management we were told the reason to be that Company A’s head traded decided to sell to invest in new securities with higher yield.

Accounting Question 1
Our recommendation on the classification of the Available for Sale securities as “temporary”.
Authoritative Literature
FASB ASC 320-10-35-33 Evaluate Whether an Impairment Is Other than Temporary-Debt Securities
Accounting Discussion 1
Under FASB ASC 320-10-35-33, impairment shall be classified as other-than-temporarily impaired in the period which the investor decides to sell the investment. For the reporting period ending March 31, 20X6, Company A memo states that they do not intend to sell the debt securities at the first quarter period ending date. Furthermore, Section 320-10-35-33B states “If the entity more likely than not will be required to sell the security before recovery of its amortized cost basis, an other-than-temporary impairment shall be considered to have occurred.” Our client has provided written evidence that it is not more-likely-than-not that they will be required to sell the securities before recovery of their

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