For debt securities, the engagement team should consider management's assertions about its intent to sell an impaired security or if it is more likely than not (MLTN) that management will be required to sell the impaired security before recovery of the entire cost basis. As noted in ARM 5010.45, if either of these conditions exists, the impairment is considered other-than-temporary.

In addition to obtaining the appropriate representations in management's representation letter, an engagement team should consider the following factors when evaluating management's assertions:

If an entity has the "intent to sell" an AFS or HTM debt security that is impaired, the entity is required to recognize OTTI on that debt security. The guidance indicates that the intent to sell exists when an entity has decided to sell a debt security, but it does not provide guidance for determining when such a decision is deemed to have been made. Judgement will be required and consideration should be given to all available evidence. For example, a decision to sell that is contingent upon the occurrence of a future event may not be evidence of a present intent to sell that would result in an OTTI. The following indicators, though not all-inclusive, may assist in making determinations about the point at which an entity has the intent to sell a security:

In general, we would expect a relatively short period of time to elapse between an entity's assertion about its intent to sell and an actual sale. An entity should ensure its financial reporting systems and related internal controls allow for the determination, in a timely and consistent manner, of when the intent to sell a security exists.

Determining whether an OTTI must be recognized because it is MLTN that the entity will be required to sell an impaired debt security involves an assessment of two factors:

Implicit in these factors is the notion that not all potential sales of impaired debt securities that are considered MLTN will result in OTTI. In general, only sales that involve a level of legal, regulatory, or operational compulsion should be considered "required" sales, consistent with the guidance that an entity should consider "its cash or working capital requirement or contractual or regulatory obligations that indicate that the security will be required to be sold before a forecasted recovery occurs." Once the conditions or events that may require the sale of an impaired debt security are identified, an entity should determine whether it is considered MLTN that these conditions or events will occur. If it is considered MLTN, judgement may be needed to determine which debt securities would be sold if the events or conditions actually do occur, and an OTTI must be recognized on these debt securities. We believe that the potential sale of an impaired debt security, even if considered MLTN, may not result in an OTTI if that sale is not a "required" sale. Other indicators must still be considered to determine whether OTTI should be recognized.

For example, the Volcker Rule (the “Rule”) prohibits banking entities and nonbank financial companies supervised by the Board of Governors of the Federal Reserve System (“Supervised Banks”) from having investments considered ownership interests in “covered funds” as defined in the Rule. If a Supervised Bank concludes that it is MLTN that it will be required to sell an investment in order to comply with the regulatory obligations related to the Volcker Rule and the fair value of the security is less than its amortized cost at the measurement date, impairment recognition would be required based on the difference between the then current fair value of the security and its amortized cost basis.

In circumstances in which OTTI is recognized because it is MLTN that the entity will be required to sell the debt security, the noncredit portion of the OTTI may be recognized in OCI if it is not MLTN that the entity will be required to sell the debt security before recovery of its amortized cost basis, less any current period credit loss. This involves determining the timing of a required sale, the adjusted amortized cost at that date, and projecting the fair value/sales price at that date. Essentially, if the noncredit portion of the OTTI and all expected cash flows would be recovered by the date of the MLTN required sale, only the credit portion of OTTI would be recognized in income. Because of the subjectivity involved in estimating the date of a required sale and of projecting recovery of noncredit elements (which are based on changes in various market factors such as risk-free interest rates, liquidity premiums, etc.), it may be difficult for entities to provide persuasive evidence to support recognizing only the credit portion in OTTI. As a result, we generally expect that entities will recognize OTTI in income equal to the difference between the debt security's fair value and its amortized cost.

For debt securities, once a decision to sell the security has been made or it is MLTN that the entity will be required to sell the security before recovery of its amortized cost basis, an other-than-temporary impairment should be considered to have occurred.

Subsequent sales of AFS debt securities at a loss may call into question the validity of an entity's assertions that it does not "intend to sell" or is not "MLTN required to sell" the debt security before recovery of its entire cost basis under ASC 320-10-35. Facts and circumstances must be assessed in evaluating an entity's prior assertions. An entity's assertion regarding its intent to sell is made at a point in time and that intent may change over time. In addition, even though it may not be considered more likely than not that the sale of an impaired debt security will be required, such a sale may still be possible. A sale at a loss in these circumstances would not necessarily call into question the entity's prior assertion, unless it was determined that the entity incorrectly concluded that such a sale was not more likely than not. Entities should document why recent sales do not impact their other-than-temporary impairment assertions.