FAR Section 4.1

Question 1

Which financial instruments does U.S. GAAP require to be reported at fair value in a company’s financial statements?

Answer 1

recognition of assets acquired, liabilities assumed, and minority interests in business combinations reported as acquisitions; the reporting of assets after recognition of an impairment loss; the reporting of certain marketable securities that are reported as trading or available for sale securities; and all derivatives. Stock options held for investment are derivatives that are required to be reported at fair value.

Question 2

Beach Co. determined that the decline in the fair market value (FMV) of an investment was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach’s books. The controller would properly record the decrease in FMV by including it in which of the following?

Answer 2

The controller would properly record the decrease in FMV by including it in the earnings section of the income statement and writing down the cost basis of the investment to its FMV. If available-for-sale securities experience a loss that is considered “other than temporary” (permanent), then the security must be written down to a new cost basis and it is treated as a realized loss.