Fair Value Case
Case 11-2(b)
Fair Value Disclosures
Case 11-2(b) is an extension of Case 11-2(a). For this case, assume that the Case 11-2(a) facts remain, with the exception of the additional assumptions listed below for each security. As stated in Case 11-2(a), Family Finance Co. (FFC) accounts for its investments at fair value, with changes in fair value reflected either in earnings (for trading securities) or other comprehensive income (OCI) (for available-for-sale (AFS) securities). 1 Because FFC uses the interest rate swap in a cash-flow hedge, FFC measures the derivative at fair value, presenting the portion of the fair value change that effectively offsets cash flow variability on its corporate debt in OCI and the remainder in earnings.
Additional facts related to specific securities and derivatives owned by FFC are described below. Also refer to the data table at the end of this section for the fair value amounts for each instrument needed to complete the case.
S tudents should assume that all amounts discussed below and those included in the data tables are U.S. dollars in thousands.
Instrument 1 — Collateralized Debt Obligation
•
FFC classifies its collateralized debt obligation (CDO) within Level 3 of the ASC
820, Fair Value Measurement, fair value hierarchy as of December 31, 2012.
•
FFC identified October 1, 2012, as the date on which the CDO’s fair value measurement changed in classification from Level 2 to Level 3.
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FFC determined the broker quotes were not significant to the fair value measurement in its entirety because those quotes resulted in a management adjustment to the income-approach discount rate of just 1 percent. On the basis of sensitivity analysis performed by adjusting the discount rate, management determined percentage changes of 2 percent result in a significantly higher or lower fair value. Further, management performed a qualitative assessment of the significance of these inputs to its fair value
Fair Value Disclosures
Case 11-2(b) is an extension of Case 11-2(a). For this case, assume that the Case 11-2(a) facts remain, with the exception of the additional assumptions listed below for each security. As stated in Case 11-2(a), Family Finance Co. (FFC) accounts for its investments at fair value, with changes in fair value reflected either in earnings (for trading securities) or other comprehensive income (OCI) (for available-for-sale (AFS) securities). 1 Because FFC uses the interest rate swap in a cash-flow hedge, FFC measures the derivative at fair value, presenting the portion of the fair value change that effectively offsets cash flow variability on its corporate debt in OCI and the remainder in earnings.
Additional facts related to specific securities and derivatives owned by FFC are described below. Also refer to the data table at the end of this section for the fair value amounts for each instrument needed to complete the case.
S tudents should assume that all amounts discussed below and those included in the data tables are U.S. dollars in thousands.
Instrument 1 — Collateralized Debt Obligation
•
FFC classifies its collateralized debt obligation (CDO) within Level 3 of the ASC
820, Fair Value Measurement, fair value hierarchy as of December 31, 2012.
•
FFC identified October 1, 2012, as the date on which the CDO’s fair value measurement changed in classification from Level 2 to Level 3.
•
FFC determined the broker quotes were not significant to the fair value measurement in its entirety because those quotes resulted in a management adjustment to the income-approach discount rate of just 1 percent. On the basis of sensitivity analysis performed by adjusting the discount rate, management determined percentage changes of 2 percent result in a significantly higher or lower fair value. Further, management performed a qualitative assessment of the significance of these inputs to its fair value