Case 08-8 Gainey Auto, Inc. Albert Gator, the someone of Gainey Auto Inc. ("Gainey"), has requested a gathering with the contact aggroup and the honcho business tar of Gainey to handle implementation issues related with the acceptation of FASB Statements No. 157, Fair Value Measurements, and No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Gainey has meet filed its Sept 30, 2007, Form 10-Q and is fascinated in understanding the implications of the acceptation of the clean continuance choice ("FVO") for certain assets and liabilities. Gainey understands that in visit to administer the FVO to the selected items for business 2008, the consort staleness attain and writing its elections by January 1, 2008, but Gainey is blurred as to every of the implications. Albert indicated that Gainey is considering electing the clean continuance choice for certain 1 investments in debt securities that are accounted for as available-for-sale ("AFS"), an investment in a render venture, nervy artefact contracts, an issuance of long-term debt, and a warranty obligation. Albert has provided the mass info most these assets and liabilities. . Assets include: • AFS debt securities which are traded on exchanges that are considered "active markets." • A 50 proportionality restricted partnership control welfare in a render stake called Tebow. The Tebow assets is accounted for low the justness method of accounting. Tebow owns and operates a ring manufacturing being in Jacksonville, Florida. Gainey also funded the Tebow render stake start-up activities finished an advance that is recorded as a give receivable on Gainey's equilibrise artefact at a carrying continuance of $19.5 meg as of Oct 1, 2007. • Ninety-day nervy artefact contracts to acquire poise utilised in creation of its vehicles. These contracts do not meet the definition of a figuring under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and are not currently reportable on the equilibrise sheet, eliminate for periodic contract settlement balances. Liabilities include: • $2 1000000000 of immobile evaluate open debt that is actively traded on an exchange. This debt is full qualified with an welfare evaluate switch (notional equals grappling continuance of debt) that meets the equivocation criteria in Statement 133 and is appropriately accounted for as a clean continuance hedge. Unamortized debt issuance costs related with this debt helper are $4 meg as of Oct 1, 2007. • • A warranty aggregation providing equal parts, including some related service (e.g., installation) for nonfunctional products for up to fivesome years. Under the program, Gainey haw exclusive resolve the warranty by providing equal parts and services (i.e., Gainey cannot resolve a verify in change or pay a ordinal band to action low the warranty). In preparation for implementing Statement 159 on Jan 1, 2008, including having all of the required substantiation in place, Gainey performed a "mock" implementation as of Oct 1, 2007. Before the meeting, Albert gave the contact aggroup an psychotherapy of the carrying continuance and estimated clean continuance of the assets and liabilities as of Oct 1, 2007, (the theoretic fellow of adoption), as presented below. Albert and the CFO would same the contact aggroup to analyse the psychotherapy and discuss whether management's psychotherapy is commonsensible and appropriate. Albert and the CFO are planning to inform this aggregation to the Board of Directors after in the month. : "Mock" Implementation â€" Gainey Analysis as of Oct 1, 2007 Type of Instrument Assets AFS securities (See state A) Investment in Tebow Commodity contracts Liabilities Public fixed-rate debt (See state B) Interest evaluate swap Warranty obligation October 1,2 Preelection Carrying Value ;•;;.: Br/(Cr) $ 35,000 $ 45,000 $- $ (1,975,000) $ (25,000) $(1,400,000) 007- | : Fair Value; Dr/(Cr) 1 in OOO's $ 33,000 $ 47,000 $ 600,000 $ (2,100,000) $ (25,000) $ (1,300,000) Y Pretax H Impact of Initial 1 Adoption $ 2,000 $- $ (600,000) $ 125,000 $- $ (100,000) Notes: A: Because Gainey holds a material function in destined AFS securities, Gainey's management believes the consort would belike obtain less than the quoted market toll if it were to liquidate the entire function at once. Therefore, Gainey reduced the quoted mart continuance of these securities by $2 meg to arrive at the fair value (i.e., Gainey merged a country discount). B: Unamortized debt issuance costs were $4 meg as of Oct 1. 2007. Required: Answer the mass questions, documenting some issues identified and every professional literature utilised to hold recommendations and conclusions for partitioning these issues. Issue 1: Is the election of the FVO and the activity low Statement 157 of the , items traded beneath appropriate, accurate, and complete? If not, what observations i caused the contact aggroup concern? Instruments Is t
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