Financial Assets Case

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Case 3 Financial assets Big Bank Background The Big Bank (USBB) is a large, multinational US bank which has a significant subsidiary in Ireland. This subsidiary, USBB – Ireland (USBBI), has made a number of investments in foreign corporate debt instruments since its founding in 2000. During the last few years there has been a decrease in the credit quality for many companies due to the overall global recession. USBB is specifically interested in one of its investments in a large corporate debt instrument issued by Cruise Ireland totaling €100,000,000, which was designated as AFS when it was purchased on January 1, 2007. In 2008, the fair value of the debt instrument decreased by 30% from the original purchase price, or by €30,000,000. This was determined at June 30, 2008, at which time management of USBBI concluded that the debt instrument was impaired. An impairment loss of €30,000,000 was recognized by USBBI at that time under IFRS and also by USBB upon consolidation of USBBI. The accounting treatment for the impairment was the same under US GAAP, thus there were no conforming accounting entries needed by USBB. The entire loss was attributable to deteriorating credit quality and there was no provision made for interest rate differences, which may have affected the fair value of the debt instrument at June 30, 2008. There was no further deterioration or improvement in fair value in 2009, but in 2010 the fair value of the debt instrument increased by €25,000,000 due to the improving financial condition of Cruise Ireland. USBBI does not intend to sell this debt instrument. The CFO of USBB has asked you to evaluate how the accounting for the increase in fair value of the debt instrument may be recorded under US GAAP and under IFRS, given the following situations. ► Situation 1 – Management of USBBI can determine that there is no longer any

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