ASC 325-40-35-9 provides some relief from the other-than-temporary impairment requirements for an investor holding a “plain vanilla” beneficial interest otherwise subject to ASC 325-40.

Variable-rate beneficial interests issued by securitization entities that qualify as “plain vanilla” are common. The following example illustrates the application of the guidance in ASC 325-40-35-9.

Investor Co owns a collateralized loan obligation (a beneficial interest in a pool of securitized commercial loans), or CLO, as part of its investment portfolio. Rated single-A, the beneficial interest is a variable-rate debt security having a principal amount of $10 million, purchased at par. The CLO’s interest rate resets each quarter based on then-current 3-month LIBOR, plus a fixed spread of 250 basis points. Investor Co reports the investment as available-for-sale.

At the current reporting date (June 30, 2018), the fair value of the beneficial interest is $9.7 million. Based on updated collateral prepayment information and forward interest rates, Investor Co determines that, at June 30th, both the gross amounts and the present value of the cash inflows it expects to receive on its investment will be less than the corresponding amounts calculated at March 31st. As such, Investor Co concludes that the CLO has undergone an adverse change in cash flows, based on applying the guidance in ASC 325-40-35-4(a).

Investor Co concludes that the unrealized loss on the beneficial interest is due to a combination of market factors unrelated to credit; it still expects to receive all contractual payments of principal and interest when due. Investor Co has the ability and intent to hold the collateralized loan obligation; that is, it does not intend to sell the CLO, and it is not more likely than not that it will be required to sell the beneficial interest before it recovers its investment.

Considering the foregoing, should Investor Co record an other-than-temporary impairment charge of $300,000 on the CLO at June 30?

No, based on the stipulated facts and judgments. The CLO has the characteristics of a plain-vanilla beneficial interest contemplated in ASC 325-40-35-9 – a debt security whose interest coupon resets quarterly based on 3-month LIBOR, plus a spread fixed at issuance. Further, despite the decline in the CLO’s fair value below its carrying amount, there is no indication at the reporting date that the beneficial interest has suffered or will experience a credit loss. Therefore, despite the fact that there has been an adverse change in future cash flows and a decline in the investment’s fair value below its reference amount, it would be inappropriate to conclude that an other-than-temporary impairment has occurred (based on applying the guidance in ASC 325-40-35-4), given the CLO’s “plain-vanilla” character. Finally, Investor Co has the ability and intent to hold the beneficial interest until recovery. Accordingly, Investor Co should continue to recognize periodic interest income based on the CLO’s current coupon rate, and report the beneficial interest at its current fair value ($9.7 million), with a corresponding $300,000 charge to OCI, as of June 30.

Consistent with the guidance in ASC 320-10-35, if at June 30 Investor Co intended to sell the CLO, or concluded it was more likely than not that it would be required to sell the investment before recovery of its cost basis ($10 million), Investor Co would recognize an other-than-temporary impairment charge ($300,000) in earnings.