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Gainey Auto, Inc wants to adopt FASB Statement No. 157– Fair Value Measurements, and No. 159–the Fair Value Option, for its financial assets and financial liabilities.  For achieve this, it needs to prove that the details about its assets and liabilities (such as available for sale securities, investment, public fixed–rate debt, interest rate swap, and warranty obligation) are appropriate, accurate, and complete.

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Available for Sale (AFS) Securities

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According to FASB 159 par 28–the election of the Fair Value Option and the measurement of the item under Statement 157, they are appropriate, accurate, and complete. Available-for-sale and held-to-maturity securities held at the effective date are eligible for the fair value option at that date. In the event that the fair value option is selected for any of those securities at the effective date, cumulative holding (unrealized) gains and losses must be included in the cumulative-effect adjustment.

The amount of unrealized gains and losses reclassified from accumulated other comprehensive income (for available-for-sale securities) and the amount of unrealized gains and a loss that was previously unrecognized (for held-to-maturity securities) shall be separately disclosed.

Investment in Tebow

According to FASB 159 par 8 (a)–the election of the Fair Value Option and the measurement of the item under Statement 157, the details of this investment are appropriate, accurate, and complete. There is a change in the accounting treatment for an investment in another company because the investment becomes subject to the equity method as the investor no longer consolidates a subsidiary because a majority interest no longer exists while some minority interest still does.

Commodity Contracts

According to FASB 159 par 7 (f)–the election of the Fair Value Option (FVO) and the measurement of the item under Statement 157,  they are inappropriate, accurate, and complete because this contract does not meet the definition of a financial instrument. According to FASB 159, in the case of nonfinancial insurance contracts and warranties, the insurer can settle by paying a third party to provide those goods or services.

Public Fixed-Rate Debt Including Interest Rate Swap

According to FASB 157 par 26–the election of the Fair Value Option (FVO) and the measurement of the item under Statement 157, they are appropriate, accurate, and complete. FASB statement 126 rules “the difference between the carrying amount and the fair value of eligible items for which the fair value option is elected at the effective date shall be removed from the statement of financial position and included in the cumulative-effect adjustment.”  In Gainey’s case, the lack of information on the variables has been taken into account when establishing their Fair Value.

Warranty Obligations

According to FASB 159 par 7 (e) — the election of the Fair Value Option (FVO) and the measurement of the item under Statement 157, they are inappropriate, accurate, and complete. The reason is that in terms of nonfinancial insurance contracts and warranties, the insurer can settle by paying a third party to provide those goods or services.

In this case, according to FASB 159 par 28, Gainey Auto, Inc would be required to report interest income from the AFS debt securities. It can recognize the interest income as part of other changes in fair value. FASB 28 rules “if Statement 157 is adopted at the same time that this Statement is adopted, any change in an existing eligible item’s recorded fair value at the effective date due to application of the guidance in Statement 157 (such as for an available-for-sale security) shall be included in the cumulative-effect adjustment if the fair value option was elected for that eligible item.” Or it can be recognized separately. However, if Gainey chose to recognize the interest income separately, it should disclose “the aggregate fair value of loans in nonaccrual status” according to FASB 159 par 18 (e).

References

Financial Accounting Series. Financial Accounting Standards Board of the Financial Accounting Foundation. (2006). Retrieved June 18, 2009, from http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220137031

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