Weathering the "Other-Than-Temporary" Impairment Storm

EXECUTIVE SUMMARY

Accounting guidance requires entities to categorize an investment security into one of three categories upon acquisition: held to maturity (“HTM”), trading, or available for sale (“AFS”). In addition to defining the three classifications of securities, an entity is required to assess both the classification of AFS and HTM securities each reporting period and to determine whether any declines in fair value below amortized cost should be considered other than temporary.

There are two primary accounting models for assessing impairment on securities. EITF 99-20 applies to all credit-sensitive mortgage- and asset-backed securities and certain prepayment- sensitive securities and FAS 115 applies to all other securities, except investments accounted for under the equity-method. Subsequent to the issuance of FSP EITF 99-20-1, the models are essentially the same.

Companies must disclose, (in tabular format) the amount of unrealized losses and the aggregated fair value of investments with unrealized losses in investment securities whose fair value is less than book value and for which an other-than-temporary impairment charge has not been taken. Additional narrative disclosure is required to provide insight into an entity’s rationale for concluding that existing impairment(s) is temporary.

Entities should consider all available evidence in determining whether an other-thantemporary charge should be recognized. Greater weight should be placed on evidence that is objective and verifiable than subjective assumptions. The application of a “bright line” or “rule of thumb” test is not appropriate.

Entities should employ a systematic methodology that is applied consistently and includes formal documentation of the factors considered when assessing impairment.

Click HERE to read the full article. This piece was co-written with Thomas G. Rees, CPA, CFA, CFE