Copyright 2007 Deloitte Development LLC All Rights Reserved. Cas e 10-7 Impaire d Abilitie s Sce nario A On March 31, 2010, at the end of its first quarter, Company A owned a portfolio of investment-grade, fixed-rate debt securities classified as available for sale. Because of interest rate increases that occurred between the date that certain securities were acquired and March 31, 2010, a material portion of the portfolio was “underwater.” Company A evaluated this decline in fair value to determine whether it is other than temporary and concluded that the decline is temporary. Company A provided the auditors with a brief memo documenting its conclusion as of the period end as follows: M E M O R A N D U M TO: Company A Files FROM: Controller DATE: March 31, 2010 SUBJECT: Assessment of Impairment As of March 31, 2010, management has reviewed the investment portfolio and has identified the following investments with a fair value below amortized cost: Investment Acquisition Date Amortized Cost Fair Value Unrealized (Loss) Duration of Impairment Municipal bonds 9/30/08 $8,500,000 $7,500,000 ($1,000,000) 18 months Corporate bonds 7/30/07 $8,200,000 $6,800,000 ($1,400,000) 32 months We have determined that the debt securities are not other-than-temporarily impaired on the basis of the following facts: • We do not intend to sell the debt securities as of March 31, 2010. • We have determined that it is not more likely than not that we will be required to sell the debt securities before recovery of their amortized cost bases. • The decline is attributable solely to adverse interest rate movements. • The principal and interest payments have been made as scheduled, and there is no evidence that the debtor will not continue to make them as scheduled. That is, we expect to fully recover the amortized cost bases of these securities. Accordingly, we will not record an impairment loss in earnings. Case 10-7: Impaired Abilit ies P age 2 Copyright 2007 Deloitte Development LLC All Rights Reserved. In addition, A has provided a written representation to its auditors that as of March 31, 2010, A does not intend to sell the debt securities and it is not more likely than not that A will be required to sell the debt securities before recovery of their amortized cost bases. On April 30, 2010, A sold certain of the “temporarily impaired” debt securities in its portfolio and realized a loss on the sale. Management told the auditors that the reason for the sale was that A’s head trader decided to sell these securities and invest in new securities that would provide A with an increased yield. Re quire d: • You have been asked by the engagement partner to (1) react to both the client memo and other related information and (2) provide a supported position regarding the appropriate accounting for these securities as of the March 31, 2010, balance shee.

1. Copyright 2007 Deloitte Development LLC
All Rights Reserved.
Cas e 10-7
Impaire d Abilitie s
Sce nario A
On March 31, 2010, at the end of its first quarter, Company A
owned a portfolio of
investment-grade, fixed-rate debt securities classified as
available for sale. Because of
interest rate increases that occurred between the date that
certain securities were acquired
and March 31, 2010, a material portion of the portfolio was
“underwater.” Company A
evaluated this decline in fair value to determine whether it is
other than temporary and
concluded that the decline is temporary.
Company A provided the auditors with a brief memo
documenting its conclusion as of
the period end as follows:
M E M O R A N D U M
TO: Company A Files
FROM: Controller
DATE: March 31, 2010
SUBJECT: Assessment of Impairment

2. As of March 31, 2010, management has reviewed the investment
portfolio and has
identified the following investments with a fair value below
amortized cost:
Investment
Acquisition
Date
Amortized
Cost
Fair Value
Unrealized
(Loss)
Duration of
Impairment
Municipal
bonds
9/30/08 $8,500,000 $7,500,000 ($1,000,000) 18 months
Corporate
bonds
7/30/07 $8,200,000 $6,800,000 ($1,400,000) 32 months
We have determined that the debt securities are not other-than-

3. temporarily impaired on
the basis of the following facts:
• We do not intend to sell the debt securities as of March 31,
2010.
• We have determined that it is not more likely than not that we
will be required
to sell the debt securities before recovery of their amortized
cost bases.
• The decline is attributable solely to adverse interest rate
movements.
• The principal and interest payments have been made as
scheduled, and there is
no evidence that the debtor will not continue to make them as
scheduled. That
is, we expect to fully recover the amortized cost bases of these
securities.
Accordingly, we will not record an impairment loss in earnings.
Case 10-7: Impaired Abilit ies P age 2
Copyright 2007 Deloitte Development LLC
All Rights Reserved.
In addition, A has provided a written representation to its
auditors that as of March 31,
2010, A does not intend to sell the debt securities and it is not
more likely than not that A

4. will be required to sell the debt securities before recovery of
their amortized cost bases.
On April 30, 2010, A sold certain of the “temporarily impaired”
debt securities in its
portfolio and realized a loss on the sale. Management told the
auditors that the reason for
the sale was that A’s head trader decided to sell these securities
and invest in new
securities that would provide A with an increased yield.
Re quire d:
• You have been asked by the engagement partner to (1) react to
both the client
memo and other related information and (2) provide a supported
position
regarding the appropriate accounting for these securities as of
the March 31, 2010,
balance sheet date.
• Would your position be affected if the fair value of the debt
securities declined
below historical cost by only 2 percent? Why or why not?
Case 10-7: Impaired Abilit ies P age 3
Copyright 2007 Deloitte Development LLC
All Rights Reserved.

5. Sce nario B
On February 1, 2010, Company X purchased 100,000 common
shares of Company B, a
large retailer of designer shoes that also has a wholesale
division, for $90 per share. The
securities are classified as available for sale. As of December
31, 2010, X’s year-end, the
fair value of X’s investment in B has declined below historical
cost. Over the past year,
the fair value of the security and related unrealized gain/loss
has fluctuated as follows:
Pe riod Ende d
Fair Value —
Company B
Unre alize d
Gain/(Los s )
March 31, 2010 $100 per share $1,000,000
June 30, 2010 $80 per share ($1,000,000)
September 30, 2010 $85 per share ($500,000)
December 31, 2010 $85 per share ($500,000)
Company X evaluated this decline in fair value to determine
whether it is other than
temporary and concluded that the decline is temporary on the
basis of the following:
• The duration of the impairment is less than one year.
• Company X forecasts recovery by April 2011.

6. • Company B’s share price has experienced temporary declines
in the past.
• Company B has a high credit rating.
Company X has provided a written representation to its auditors
that as of December 31,
2010, it has the positive intent and ability to hold these
impaired securities for a period
sufficient to allow for the anticipated recovery in market value.
The 2010 financial
statements were issued on March 1, 2011.
On March 15, 2011, B announced in a press release a plan to
dispose of a major segment
of its business and restructure the remaining operations to allow
the company to leave the
retail market and concentrate solely on the wholesale market.
The press release further
(1) states that the reorganization will result in an initial loss of
revenue and significant
initial costs but (2) forecasts a return to profitability within a
reasonable period.
Immediately after reading the press release, X sold the
securities and realized a loss on
the sale.
Re quire d:
• You have been asked by the engagement partner to (1) react to
both the client’s
conclusion that the decline in value is temporary and other
related information
and (2) provide a supported position regarding the appropriate
accounting for

7. these securities as of the December 31, 2010, balance sheet
date.
Case 10-7Im
by the engagement partner to (1) react to both the client memo
and other related information and (2) provide a supported
position regarding the appropriate accounting for these
securities as of the March 31, 2010, balance sheet d...Required: