Refer to ARM 5010.22 for general accounting guidance for beneficial interests, including recognition of interest income and impairment of beneficial interests with prepayment risk.

When assessing impairment of a security within the scope of ASC 325-40, an investor should initially perform the two step analysis outlined in ASC 320-10-35 to evaluate (1) whether the security is impaired and (2) if so, whether this impairment is other than temporary. However, in measurement of the present value of cash flows expected to be collected to evaluate a potential credit loss, the investor should follow the guidance in ASC 325-40-35-4 through ASC 325-40-35-9 for determining whether there has been a decrease in cash flows expected to be collected from cash flows previously projected.

The impairment model for beneficial interests within the scope of ASC 325-40 is based on a best estimate of future cash flows and does not apply to beneficial interests in securitized financial assets that:

The SEC staff's view is that only beneficial interests rated "AA" or better should be deemed to be of "high credit quality" for purposes of applying the scope language of ASC 325-40-15-3.

The determination of whether a beneficial interest is within the scope of ASC 325-40-15-3 may be performed at the date of acquisition or upon recognition of a noncredit other-than-temporary impairment. ASC 325-40-35-4 requires that an other-than-temporary impairment on beneficial interests be recognized if (1) based on current information and events there has been an adverse change in cash flows expected to be collected and (2) fair value is below the "reference amount" (initial investment, less cash received to date, less other-than-temporary impairment recognized in earnings to date, plus yield accreted to date).

Determining whether there has been an adverse or favorable change in cash flows expected to be collected from the cash flows previously projected (considering both timing and amount of estimated cash flows) involves comparing the present value of the remaining cash flows as estimated at the initial transaction date (or at the last date previously revised) against the present value of the cash flows expected to be collected at the current financial reporting date.

A change in the timing of estimated cash flows to be collected that results in an adverse change in estimated cash flows as defined in ASC 325-40 may result in a credit loss that must be recognized in earnings. Even when interest accrues on deferred cash flows, an extension of duration may result in an adverse change in estimated cash flows. This will happen unless interest accrues on the deferred cash flows at a rate that is at least equal to the discount rate used to calculate the present value of cash flows. If interest is not received on the deferred cash flows (including deferred interest), an adverse change in cash flows will occur. When an adverse change in cash flows has occurred and the fair value of the beneficial interest is below the "reference amount," an OTTI is considered to have occurred. In that circumstance, the difference between the present value of current period's expected cash flows and the security's current amortized cost basis is considered a credit loss that should be recognized in earnings, even though the entity may still expect to collect all contractual cash flows. When the fair value of the beneficial interest is greater than the reference amount, and an adverse change in cash flows has occurred, the accretable yield and effective interest rate should be adjusted on a prospective basis.

Consistent with the guidance applied to other debt securities, we believe that the decision to use either a single best estimate or a probability weighted measure in determining cash flows expected to be collected is a policy election (see ARM 5010.4515). Management should document and disclose its policy decision in this regard, and it should be consistently applied.

The cash flows should be discounted at the current effective interest rate used to accrete the beneficial interest. If the present value of the original cash flows is greater than the present value of the current estimated cash flows expected to be collected, an adverse change has occurred.

Absent any other factors that indicate an other-than-temporary impairment has occurred, changes in the interest rate on a plain vanilla variable-rate beneficial interest should not be considered an other-than-temporary impairment.