Generic Bank: Accounting for Debt Securities Sales and Impairments

Abstract

ABSTRACT This case examines the accounting rules for debt security impairments with a particular focus on the role of securities sales in determining whether debt securities are impaired. Generic Bank's securities portfolio contains material unrealized losses, and the bank desires to sell debt securities near the close of the fiscal year to free up resources for liquidity purposes. The case permits an examination of possible financial reporting consequences from security sales transactions under ASC 326-30, and how the structure, timing, and necessity of sales interacts with financial reporting discretion. The case also allows students to take the role of either a bank executive or an external auditor to understand how different incentives may influence areas of judgment within financial reporting. The case requirements are appropriate for upper-level undergraduate or graduate financial accounting courses.