Essay Sample on Fair Value of the Security

Introduction

According to the Financial Accounting Standards Board (FASB), securities fair values is determinable if it meets the following conditions; the security equity fair value is ascertainable if its bids quotation or the sales prices of is currently available on the securities exchange which is registered by the commission in charge of securities and exchange (SEC) in US (Financial Accounting Standards Board., 2013). Besides, the security's fair value can be decided over the counter in the market, so long as the quotations/prices that are decided over the market counter are stated publicly by the NASDAQ (i.e. the National Association of Securities and Dealers in the Automated Quotations systems) or over market Group Inc.

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Also, the security's equity fair value can be determined if it is only traded in a foreign market whose scope and breadth is comparable to that of United States of America. Moreover, the security's equity fair value can be determined if it is taken as an investment or for mutual fund (Hodder et al., 2013). In this regard, the security's equity fair value as per unit share is testified based on the current transactions. To understand whether the fair value of security equity is available, Cascade Company can find out whether the security meets the above mentioned set standards outlined by the (FASB) before carrying out investment (Riedl and Serafeim, 2014).

How Impairment of a Security Is Accounted For

Security is considered as impaired if it fair value is less than its original market price

An impairment of a security is accounted for by calculating the variance between the fair value of initial security and that of the current one in the market. The determined impairment loss is noted in the net income. To account for impairment of a security, firms or business entities are required to analyze their securities investments by following the financial reporting standards and then disclose it to the management to determine its potential to recover the price it was purchased at (Riedl and Serafeim, 2014). When accounting for impairment of security in the market, firms should determine whether it declines in the price of securities available for sale is temporary (Financial Accounting Standards Board, 2013). To assess impairment of security, investment should be evaluated and then carry out its evaluation to determine whether the impairment is temporary. Assessment is essential to decide whether reduction of the fair value of the security is lower than its original cost other than temporary or whether it can be held to its maturity (FASB, ASC 320-10-35-18). A shareholder can identify impairment in total income, especially, if there is evidence in the balance sheet, if there has been a reduction in the fair value of a particular investment that is other than temporary.

How Cascade Company Can Determine When It Is Near to Maturity and When It Can Vend Its Investment and Classify It as Held-To-Maturity

A firm must have an intention to hold its securities to maturity for its investments to be classified as whether they should be held- to -maturity. In other words, securities held to maturity refer to investments that the management is intending to keep for investment's life and not sell them before they expire or mature (Pibeam, 2018). In this case, the firm should not hold its securities to maturity if it is not willing to retain them. Securities held to maturity are classified and reported as a long-term asset at amortized costs unless their period of maturity is within one year. However, if the maturity period is one year or less, these types of securities are considered and reported as current assets.

In this regard, it, therefore, advisable for Cascade company to sell its securities if the maturity period for the investment is near. This will help the company to reduce the interests' risks that are likely to occur thus allowing the company to recover most of its principal within the remaining period (FASB, ASC 320-10-25-14). It is imperative to note that for an investment held to maturity to be worthwhile, its interest should not have an effect on the fair value of a security and also the remaining principal should be payable back at the initial value or price (Hodder et al., 2013).

Classification of Bonds as Held to Maturity

Corporations classify investments held to maturity as either debt or equity securities. Bonds are the most notable investments that are held-to-maturity (Pibeam, 2018). Since the Cascade Company intends to hold its bonds for the next five years, they can, therefore, be termed as assets held for long-term period of time, and thus they should appear in the balance sheet at a the cost that is amortized.

Disclosures Made for the Transfer of Held to Maturity Securities

The following are disclosures made during the transfer of securities which are held to maturity; parties involved should be aware and make a decision on whether to dispose of, transfer or even hold the securities until they reach their maturity date. Also, they should disclose the amount of the investment sold or transferred and complete their profits/loss made in other entities income. This is because the choice of selling investments held to maturity is either related identified or unidentified profit /loss (FASB, ASC 320-10-50-10).

References

Hodder, L., Hopkins, P., & Schipper, K., (2013). Fair value measurement in financial reporting. Foundations and Trends in Accounting 8 (3-4), 143-270.

Riedl, E. J., & Serafeim, G., (2014). Information risk and fair values: an examination of equity betas.Journal of Accounting Research 49 (4), 1083-1122.

Financial Accounting Standards Board. (2013).Statement of Financial Accounting standards (No.123). Financial Accounting Standards Board.

Pibeam,K. (2018).Finance and Financial Markets. Macmillan International Higher Education.