If the fair value of a debt security is less than its cost or amortized cost at the balance sheet date, an investor should determine whether the impairment is temporary or other-than-temporary.

An impairment is considered other-than-temporary for debt securities under the following three circumstances:

Companies should consider all available information and numerous factors when estimating whether a credit loss exists for securities with unrealized losses, including those relating to debt securities with impairments due to interest rate and/or sector spread increases (e.g., high credit quality investments). ASC 320-10-35-33F through ASC 320-10-35-33I provides examples of information and indicators to evaluate, including the following:

The SEC staff has stated that existing US GAAP does not provide "bright lines" or "safe harbors" in making a judgement about other-than-temporary impairments. However, "rules of thumb” that consider the nature of the underlying investment can be useful tools for management and auditors in identifying securities that warrant a higher level of evaluation.

The use of pre-determined parameters, for example, based on the relationship of fair value to cost, is a common management tool to assist with prioritizing and determining the extent of the analysis to be performed to determine whether these impairments should be considered "other-than-temporary." However, such a comparison, in and of itself, is typically not sufficient to conclude that an other-than-temporary impairment loss should be recognized.

As market conditions change, historical screens may no longer capture the same other-than-temporary impairment risk exposures as in prior periods. As noted earlier, use of a screen does not relieve management of its responsibility to ensure that other-than-temporary impairment considerations are properly applied to all securities.

Question: In general, how should the extent (severity) of decline in fair value for a debt security be considered in an other-than-temporary impairment analysis?

Interpretive response: Management should consider the extent to which the fair value of a security has declined (and the duration of the decline) to determine whether an other-than-temporary impairment should be recognized. The duration and extent of a decline in fair value below cost is a negative factor in the assessment of whether the investment is impaired.

A decline in fair value of a debt security may occur for a number of reasons, including changes in the risk-free interest rate, changes in general credit spreads, changes in issuer-specific credit spread, liquidity premiums, and other factors. In general, if management expects to recover the entire amortized cost basis of its debt security, a decline in fair value need not result in an other-than-temporary impairment charge provided management does not intend to sell or more likely than not will not be required to sell that debt security until a recovery in value occurs.

Rather than focusing solely on quantitative declines in fair value, management should assess the reasons for such declines as part of its other-than-temporary impairment analysis of the security's remaining duration by assessing the implied market yield (yield based on expected cash flows assuming purchase at current fair value). For example, the implied market yield of two securities currently trading at 80% of par differs greatly if one security matures in one year and the other security matures in 30 years. An implied market yield significantly in excess of other securities with similar remaining durations may be indicative of issuer-specific credit concerns, which may result in an other-than-temporary impairment.

Question: How does the transfer of a debt security accounted for under ASC 320 from the available-for-sale ("AFS") category to the held-to-maturity ("HTM") category impact the other-than-temporary impairment evaluation and investment income recognition for that security?

Interpretive response: Such a transfer should have no effect on the timing or amount of any credit-related impairment loss or investment income recognized for that security. ASC 320-10-35-10 sets forth the accounting for transfers of debt securities from AFS to HTM and essentially requires that the fair value of the security at the date of the transfer be used as the new basis of that security, which may result in the creation of additional discount or premium at that time. The unrealized holding gain or loss (non-credit related changes in fair value) on the date of transfer is then amortized to income over the remaining life of the security as an adjustment of yield, in a manner consistent with the amortization of any premium or discount. ASC 320-10-35-10 notes that this additional amortization (of the unrealized holding gain or loss on the date of transfer) will "offset or mitigate the effect on interest income of the amortization of the premium or discount for that held-to-maturity security."

With regard to impairments, the transfer from AFS to HTM does not change the requirement to determine whether management is expected to recover the entire cost basis of the debt security nor does it "reset the clock" in determining the severity or duration of an impairment that may be other-than-temporary. When management does not expect to recover the entire amortized cost basis, the security should be written down to an amount equal to the previous amortized cost basis less the amount of impairment recognized in earnings.