Assume you are an auditor, and your client is a public company with a large portfolio of available-for-sale equity securities. The client reports these securities at fair value, with unrealized gains and losses recognized in "other comprehensive income," an equity account, each period.

The client is preparing its quarterly financial statements and is again - for the second consecutive quarter - recording a decline in market value for several of the securities. These securities' fair values are now below their cost. From experience, you know that losses on available-for-sale securities must be recognized inearningsif (1) the securities are consideredimpaired(i.e., cost basis in excess of fair value) and (2) if the impairment is considered "other than temporary." Your client has asserted that it has the ability and intent to hold the securities, at least until their value recovers, and believes that the losses need only be recognized in OCI.

Using the Financial Accounting Standards Codification (ASC), answer the following questions:

1) Explain the general requirement regarding impairment of available-for-sale securities

2) Should the change in security vales be considered an other-than-temporary impairment and therefore recognized in earnings?

Answer rating: 100% (QA)

1 The general requirement regarding impairment of availableforsale securities is outlined in the Financial Accounting Standards Codification ASC in AS... View the full answer