Write a memo to mark

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Reference no: EM131298135

Rainy Day Insurance Company maintains an extensive portfolio of bond investments classified as available-for-sale securities under FASB 115 (ASC 320). The bond investments have a variety of fixed interest rates and have maturity dates ranging from 1 to 15 years. Rainy Day acquired the bonds with the expectation that it could hold them until maturity or sell them any time that funds are required for unusually high insurance claims.,

Because of the large dollar amount invested, Rainy Day is concerned about fluctuations in interest rates that affect the fair value of its bond portfolio. One of Rainy Day's investment professionals has proposed that the company invest in an interest rate futures contract to hedge its exposure to interest rate changes. Changes in the fair value of the futures contract would offset changes in the bond portfolio's fair value. If Rainy Day applies hedge accounting under FASB 133 (ASC 815), the income statement effect of changes in the fair value of the derivative would be offset by recording in earnings the changes in the fair value of the bond portfolio attributable to the hedged (interest rate) risk.

Required

Obtain the most current accounting standards on accounting for hedges of available-for sale securities. You can obtain access to accounting standards through the FASB codification. Rainy Day's CFO, Mark Becker, has asked you, as an accountant in Rainy Day's investment division, to determine whether hedge accounting can be used in the scenario proposed. Write a memo to Mark, reporting on the results of your research. Support your recommendations with citations and quotations from the authoritative financial reporting standards. Minimum 250 Words

Reference no: EM131298135

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