You have completed your audit of M&M Company’s (a private company) 2020 financial statements. You decided to date your audit report February 15, 2021. Your audit report will only cover M&Mâ€™s 2020 financial statements. You have not been engaged to report on key audit matters (critical audit matters).
During the audit, you became aware the investment banking house, Bright & Bright, Inc. (B&B), had filed for bankruptcy on February 12, 2021. Hereâ€™s the problem. At December 31, 2020, M&M’s year-end, the company had a significant ($10 million) investment in B&B’s unsecured commercial paper. The commercial paper matured on January 6, 2021, but was extended for another 30 days. When the commercial paper matured again on February 6, 2021, it was again reinvested for another 30 days. As a result of the bankruptcy on February 12, 2021, M&M incurred a loss of $10 million related to its investment in B&B commercial paper. The controller of M&M stated adamantly that M&M would not record the $10 million loss in 2020. “It’s clearly a Type II Event,” she argued.
Answer the following – Should M&M’s 2020 income statement include the $10 million loss related to its investment in B&B commercial paper? Discuss the reasons for your answer.
Based on your answer to the prior question, draft your audit report on M&M’s 2020 financial statements assuming the $10 million loss related to its investment in commercial paper is not included in the 2020 income statement. A footnote, however, is included in the 2020 financial statements describing B&B’s bankruptcy in 2021 and the related $10 million loss that would be included in M&Mâ€™s 2021 income statement. You can assume the $10 million is highly material and pervasive. There were no other reporting issues. Discuss the reasons why you believe your audit report is appropriate.
Your conclusions should be supported by the FASB and AICPA authoritative literature.