Can you please help me with this discussion? Thank You...
Case C11-6: Accounting for Hedges of Available-for-SaleSecurities
Rainy Day Insurance Company maintains an extensive portfolio ofbond investments classified as available-for-sale securities underFASB 115 (ASC 320). The bond investments have a variety of fixedinterest rates and have maturity dates ranging from 1 to 15 years.Rainy Day acquired the bonds with the expectation that it couldhold them until maturity or sell them any time that funds arerequired for unusually high insurance claims.
Because of the large dollar amount invested, Rainy Day isconcerned about fluctuations in interest rates that affect the fairvalue of its bond portfolio. One of Rainy Dayâs investmentprofessionals has proposed that the company invest in an interestrate futures contract to hedge its exposure to interest ratechanges. Changes in the fair value of the futures contract wouldoffset changes in the bond portfolioâs fair value. If Rainy Dayapplies hedge accounting under FASB 133 (ASC 815), the incomestatement effect of changes in the fair value of the derivativewould be offset by recording in earnings the changes in the fairvalue of the bond portfolio attributable to the hedged (interestrate) risk.
Required:
Obtain the most current accounting standards on accounting forhedges of available-for-sale securities. You can obtain access toaccounting standards through the FARS, from your library, or fromsome other source.
Rainy Dayâs CFO, Mark Becker, has asked you, as an accountant inRainy Dayâs investment division, to determine whether hedgeaccounting can be used in the scenario proposed. Write a memo toMark, reporting on the results of your research. Support yourrecommendations with citations and quotations from theauthoritative financial reporting standards.
Can you please help me with this discussion? Thank You...
Case C11-6: Accounting for Hedges of Available-for-SaleSecurities
Rainy Day Insurance Company maintains an extensive portfolio ofbond investments classified as available-for-sale securities underFASB 115 (ASC 320). The bond investments have a variety of fixedinterest rates and have maturity dates ranging from 1 to 15 years.Rainy Day acquired the bonds with the expectation that it couldhold them until maturity or sell them any time that funds arerequired for unusually high insurance claims.
Because of the large dollar amount invested, Rainy Day isconcerned about fluctuations in interest rates that affect the fairvalue of its bond portfolio. One of Rainy Dayâs investmentprofessionals has proposed that the company invest in an interestrate futures contract to hedge its exposure to interest ratechanges. Changes in the fair value of the futures contract wouldoffset changes in the bond portfolioâs fair value. If Rainy Dayapplies hedge accounting under FASB 133 (ASC 815), the incomestatement effect of changes in the fair value of the derivativewould be offset by recording in earnings the changes in the fairvalue of the bond portfolio attributable to the hedged (interestrate) risk.
Required:
Obtain the most current accounting standards on accounting forhedges of available-for-sale securities. You can obtain access toaccounting standards through the FARS, from your library, or fromsome other source.
Rainy Dayâs CFO, Mark Becker, has asked you, as an accountant inRainy Dayâs investment division, to determine whether hedgeaccounting can be used in the scenario proposed. Write a memo toMark, reporting on the results of your research. Support yourrecommendations with citations and quotations from theauthoritative financial reporting standards.
