Fair Value Case

eccentric person 11-2(b) bonny honor track recordlosures 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 at a lower place for each(prenominal) pledge. As stated in Case 11-2(a), Family Finance Co. (FFC) accounts for its investments at passably determine, with lurchs in fun seemly prize reflected either in earnings (for trading securities) or other comprehensive income (OCI) (for available-for-sale (AFS) securities). Because FFC uses the interest compute tack in a cash-flow hedge, FFC measures the derivative at somewhatly value, presenting the portion of the sightly value change that effectively offsets cash flow variability on its corpo pasture debt in OCI and the remainder in earnings. surplus facts related to specific securities and derivatives owned by FFC are described below. Also refer to the data bow at the end of this section for the bring togeth er value amounts for each instrument needed to off the case. S tudents should assume that all amounts discussed below and those include in the data tables are U.S. dollars in thousands. means 1 Collateralized Debt Obligation FFC classifies its collateralized debt obligation (CDO) within direct 3 of the ASC 820, bazar cheer Measurement, bewitching value power structure as of celestial latitude 31, 2012. FFC identified October 1, 2012, as the visit on which the CDOs fair value touchstone changed in classification from direct 2 to Level 3. FFC determined the broker quotes were non significant to the fair value measurement in its entirety because those quotes resulted in a commission 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 circumstances changes of 2 percent result in a significantly higher or lower fair value. Further, management performed a qual itative assessment of the significance of these inputs to its fair value measurement and concluded that it did not place much weight on these measurements because they were based on proprietary models using unobservable inputs.That is, management could not, without unreasonable effort, conclude with sufficient assurance whether the quotes were prepared in accordance with ASC 820 and reflected current securities industry conditions and market participant assumptions. FFC accounts for the CDO as a trading security. 1 Note that as discussed in Case 11-2(a), Instrument 4 is an rectitude security that does not have a readily determinable fair value and thus is not within the scope of ASC 320, Investments Debt and Equity Securities.However, FFC has elected the fair value option for the security in accordance with ASC 82510, Financial Instruments Overall, and thus accounts for the investment at fair value with changes in fair value recorded through earnings. C opyright 2009 Deloitte De velopment LLC every(prenominal) Rights Reserved. Case 11-2(b) passably think of Disc losures Page 2 Instrument 2 Mortgage-Backed certification FFC classifies its mortgage-backed security (MBS) within Level 2 of the fair value hierarchy as of December 31, 2012. FFC accounts for the MBS as a trading security. Instrument 3 Auction-Rate Security FFC classifies its auction-rate securities (ARSs) within Level 3 of the fair value hierarchy as of December 31, 2012. FFC identified November 1, 2012, as the date on which the fair value measurement of the ARSs changed in classification from Level 2 to Level 3. FFC accounts for the ARSs as AFS securities. Instrument 4 Equity Security of a Nonpublic Company FFC classifies its investment in Company X within Level 3 of the fair value hierarchy during 2012. FFC sold the equity security in October 2012 for $120. Instrument 5 Interest Rate Swap The interest rate (IR) barter is part of a portfolio of IR flip-flops.FFC individually asse ssed the IR swaps and classified them within Level 2 of the fair value hierarchy as of December 31, 2012. FFC does not measure its corporate debt at fair value with changes in fair value reported in earnings. FFC executes IR swaps with various counterparties and accounts for its IR swap assets and liabilities on a gross basis on its balance sheet. Instrument 6 Fuel Swap gaseous state FFC classifies its fuel swap within Level 3 of the fair value hierarchy as of December 31, 2012. The fuel swap was the only derivative in FFCs commodity derivatives portfolio. The fuel swaps fair value at initial recognition (January 2, 2012) was $0. Furthermore, each of the four annual swaplets 2 had an bloodline value of $0. 2 A s waplet is akin to a swap with a single settlement. For example, an IR swap with a duration of two years that re-prices and settles every quarter can also be viewed as a sequential series of eight swaplets at inception (each swaplet is net settled as of the settlement date specified in the swap contract). The fair value measurement of an IR swap considers the expected cash flows of all unsettled swaplets as of the measurement date.C opyright 2009 Deloitte Development LLC all in all Rights Reserved. Case 11-2(b) Fair Value Disc losures Page 3 The first annual swaplet settled on December 31, 2012, resulting in a net cash payment to FFC of $100. Required Using the case facts and the fair value amounts provided in the fair value data table below, prepare the annual duodecimal disclosure tables mandatory by ASC 820 as of December 31, 2012, for each of the six instruments o For fair value measurements as of the reporting date (i. e. , December 31, 2012) separately for each class of assets and liabilities.Use empty table formats 1a and 1b below to complete the required quantitative disclosures. (Note that participants are also required to identify the classes of assets and liabilities to include in send backs 1a and 1b. ) o For assets and liabili ties measured at fair value by means of significant unobservable inputs on a recurring basis, a atonement of the beginning and ending balances (i. e. , annual table) separately for each class of assets and liabilities, including where the gains or losses included in earnings are reported in the income statement.Use blank table format 2 below to complete the required quantitative disclosures. (Note that participants are also required to identify the classes of assets and liabilities to include in duck 2. ) o For certain assets and liabilities measured at fair value, (1) the amount of the total gains or losses for the period included in earnings that are attributable to the change in unrealized gains or losses relating to those assets and liabilities solace held as of the reporting date (i. e. , December 31, 2012) and (2) a description of where those unrealized gains or losses are reported in the income statement.Use blank table format 2 below to complete the required quantitative disclosures. o For assets and liabilities measured at fair value by means of significant unobservable inputs, quantitative information about the significant unobservable inputs used in the fair value measurement. Use blank table format 3 below to complete the required quantitative disclosures. (Note that participants are also required to identify the classes of assets and liabilities to include in instrument panel 3. ) Identify any qualitative disclosures required under ASC 820 for each of the six instruments as of December 31, 2012.C opyright 2009 Deloitte Development LLC All Rights Reserved. Data Tables Fair Value Data Table (U. S. dollar amounts in thousands) I nstrument 1. CDO 2. MBS 3. ARS 4. Equity security of nonpublic company (PEI) 5. IR s wap (asset) 5a. IR swap portfolio gross asset values 5b. IR swap portfolio gross liability values 5c. IR swap portfolio net assets by counterparty 5d. IR swap portfolio net liability by counterparty 6. Fuel swap Beginning Balance 1/ 1/2012 N/A N/A 75 90 N/A 200 (125) 105 (30) N/A Purchase Value / Date 50 / 6/1/12 85 / 9/1/12 N/A N/A 0 / 1/2/2012 Various Various VariousVarious 0 / 1/2/2012 Fair Value at Transfer Date 40 N/A 55 N/A N/A N/A N/A N/A N/A N/A Ending Balance 12/31/2012 25 75 50 0 40 140 (100) 60 (20) 375 I ncome Statement Line I tem craft revenues Trading revenues other revenues Other revenues Trading revenues Trading revenues Trading revenues Trading revenues Trading revenues Trading revenues PEI = private equity investments. I nstrument 5 IR Swap Portfolio (Support for Break-up by Counterparty to Compute Gross Values) Beginning Balance Asset financial obligation Net Ending balance Asset Liability Net Total A-1 200 125 75 20 30 10 140 100 40 0 15 25 Counterparties A-2 B-1 40 20 25 40 15 20 50 15 35 30 50 20 B-2 120 30 90 20 20 0 C opyright 2009 Deloitte Development LLC All Rights Reserved. Case 11-2(b) Fair Value Disc losures Page 2 Fuel Swap Data Table Pay Fixed, Receive Float (Fuel Swap) Four- year swap settles annually, executed 1/1/12, matures 12/31/15 Inception transaction price = zero (at-market swap), each of the four annual s waplets had an inception fair value = zero Cash Flow From Settlements Occurring at End of Fair Value by stage by Swaplet Swaplet Fair Value Quarter Year 1 Year 2 Year 3 Year 4 TotalFair value Year 1 (1/2/12 beginning of period) 0 0 0 0 0 N/A Fair value Year 1 (12/31/12 end of period) s ettled 120 125 130 375 Y1 100 unobservable Inputs Data Table Collateralized Debt Obligation Credit spread Discount for lack of marketability 2% 5% Aucton-Rate Security Estimate of approaching coupon rates Constant prepayment rate Credit spread Discount for lack of marketability 4. 30% 4. 00% 2. 00% 15% Aucton-Rate Security U. S. unleaded gasoline forward price curve (per gallon) CVA $2. 00 $4. 00 4. 00% C opyright 2009 Deloitte Development LLC All Rights Reserved. change for Table 1aTable 1a Description / Classes For Assets Fair Value Measurements as of Reporting Date laid by Quoted Prices in Active S ignificant Other S ignificant M arkets for Identical Assets Observable Inputs Unobservable Inputs (Level 1) (Level 2) (Level 3) CLASSES TO BE DETERMINED BY PARTICIPANTS T otal assets - Format for Table 1b Table 1b Description / Classes For Liabilities Fair Value Measurements as of Reporting Date Determined by Quoted Prices in Active S ignificant Other S ignificant M arkets for Identical Assets Observable Inputs Unobservable Inputs (Level 1) Level 2) (Level 3) CLASSES TO BE DETERMINED BY PARTICIPANTS T otal liabilities Format for Table 2 Level 3 Recurring Fair Value Measurement Disclosure Trading CDO AFS ARS PEI Retail Derivatives Commodities Beginning balance Total gains or losses (realized/unrealized) Included in earnings (or changes in net assets) Included in other comprehensive income Purchases Issues Sales Settlements Transfers into Level 3 Transfers out of Level 3 Ending balance The amount of total gains or losses for the pe riod included in earnings (or changes in net assets) attributable to the hange in unrealized gains or losses relating to assets still held as of the reporting date Realized Total C opyright 2009 Deloitte Development LLC All Rights Reserved. Case 11-2(b) Fair Value Disc losures Page 2 Format for Table 3 Level 3 Fair Value Measurements Quantitative Information About Significant Unobservable Inputs I nvestment Fair Value at 12/31/12 Valuation Technique Unobservable Input Value Instrument 1 Fair Value Technique Input 1 Input 2 Amount, range, etc. Amount, range, etc. Instrument 2 Fair Value Technique Input 1 Amount, range, etc. C opyright 2009 Deloitte Development LLC All Rights Reserved.