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¶ … Tale of Stable Mable's Unstable Investment
John Smith
Accounting 101
Stable Mable is a privately held company with a fiscal year ending on September 30th. Because of its private status, the only external reporting requirement on the company is that they must provide audited annual financial statements to shareholders and other financial leaders.
In order to seek additional levels of income, Stable Mable invested $20 million into a mutual bond fund in October of 1997. By the end of the following fiscal year, the investment went south and had an unrealized holding loss of $1.3 million. Stable Mable had to classify and establish just how to adjust their financial statements for the investment's losses. Their options were to account for the losses as realized losses or to exclude the losses from earnings as a separate component of shareholders' equity.
In addition, decisions made now could effect future financial statements because Stable Mable is considering an IPO offering. Investors would like to see the financial statement process in accordance with the SEC's accounting standards.
Key Issues
During the 1998 fiscal year, Stable Mable adopted the provisions of Financial Accounting Standards Board (FASB): Securities Statements of Financial Accounting Standards (SFAS), Statement No. 115, Accounting For Certain Investments In Debt And Equity (Issued 5/93).
Statement 115 addresses accounting and reporting for investments and based on statement 115, Stable Mable classified the deteriorating investment as 'available-for-sale'...
The unrealized holding loss was listed as a separate component of shareholder's equity.
At the end of the 1998 fiscal year, the company performed an 'impairment analysis' on the investment and concluded that the overall investment decline was not 'other than temporary' and an independent auditor concurred.
As the bond fund continued to deteriorate, a second impairment analysis was done in 1999 as the investment continued to lose value. Stable Mable had to recognize a $1.8 million charge against 1999 earnings.
After terminating the relationship with the previous independent auditors, Stable Mable brought in a second independent auditing firm. The new firm questioned whether or not Stable Mable should have taken the impairment charge in 1998 or 1999.
Review Generally Accepted Accounting Principles (GAAP) Rules
Each day, accountants make decisions as to how they should record business transactions. Decisions are often based on the financial objectives of the organization they work for but at other times the accountants use Generally Accepted Accounting Principles (GAAP). GAAP rules are not a fixed set of rules -- they are simply guidelines or a group of objectives and conventions that govern how financial statements are prepared.
A review of Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (Issued 5/93):
Statement 115 addresses accounting and reporting for investments in equity securities and those investments are to be classified in categories:
Debt securities…
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