Reporting entities should present amounts recognized in accumulated other comprehensive income (AOCI) related to held-to-maturity (HTM) and available-for-sale (AFS) debt securities for which a portion of an other-than-temporary impairment (OTTI) was recognized in net income separate from other components of AOCI.

When an OTTI is recognized, the security’s amortized cost basis is adjusted for the component of the OTTI recognized in earnings (i.e., the credit-related component). The security’s carrying value is adjusted to its fair value at the measurement date, which includes the effect of the impairment charge recorded in OCI (i.e., the whole OTTI – the credit- and non-credit-related components).

The difference between the new amortized cost basis and carrying value that arises from the recognition of an OTTI results in the need for additional analysis to determine the total OTTI to be presented in the income statement in subsequent periods. Essentially, an additional OTTI does not exist unless the fair value of the security has further declined since the most recent OTTI (i.e., below the new amortized cost basis). However, even if the fair value of the security has not decreased subsequent to the recognition of an OTTI, if a credit loss is realized, the reporting entity may recognize an additional OTTI in the income statement.

Example FSP 9-2, Example FSP 9-3, and Example FSP 9-4 illustrate the presentation and disclosure considerations associated with recording amounts in AOCI and net income for debt securities with OTTI impairments.

EXAMPLE FSP 9-2
Financial statement presentation of debt security with OTTI

On January 1, 20X4, FSP Corp acquires a debt security for $1,000 (at par) with a fixed interest rate of 4.5% per year and a maturity at December 31, 20X8. The security is classified as AFS.

On December 31, 20X7, the fair value of the debt security is $700. FSP Corp assesses whether the impairment is other-than-temporary. It determines that it does not intend to sell the security and it is not more likely than not that it will be required to sell the security. However, based on an evaluation of all available information, including a discounted cash flow analysis, FSP Corp does not expect to recover the entire amortized cost basis of the security.

FSP Corp determines a credit loss exists and, therefore, an OTTI has occurred. FSP Corp separates the total impairment of $300 (the cost basis of $1,000 less the fair value of $700 as of December 31, 20X7) into (1) the amount representing the decrease in cash flows expected to be collected (i.e., the credit loss) of $120 and (2) the amount related to all other factors of $180 (i.e., the non-credit component).

How should FSP Corp present this OTTI in its financial statements?

In accordance with ASC 320-10-35-34, FSP Corp should recognize an OTTI in net income of $120 for the credit loss and recognize the remaining impairment loss of $180 separately in OCI.

After the recognition of the OTTI, the debt security’s adjusted amortized cost basis is $880 (i.e., the previous cost basis less the credit loss recognized in net income) and its carrying value is $700 (i.e., fair value). FSP Corp presents the gross $300 impairment on the face of the income statement, with the $180 non-credit impairment deducted from that amount in a separate line.

Other presentation alternatives, as discussed in FSP 9.5.1, may be appropriate.

EXAMPLE FSP 9-3
Presentation and disclosure of OCI for AFS securities with OTTI

At December 31, 20X7, FSP Corp has an AFS debt security with a $100 amortized cost basis and a fair value of $60. FSP Corp assesses whether the impairment is other-than-temporary. It determines that it does not intend to sell the security and it is not more likely than not that it will be required to sell the security. However, based on an evaluation of all available information, including a discounted cash flow analysis, FSP Corp does not expect to recover the entire amortized cost basis of the security (i.e., the present value of the amounts expected to be collected is less than amortized cost basis). This impairment is considered other-than-temporary and comprises a $10 credit-related impairment and a $30 non-credit-related component.

At March 31, 20X8, the fair value of this AFS debt security increases to $64, with no additional credit-related impairments.

How should this AFS security be presented in OCI and disclosed in the footnotes at the end of each reporting period?

At December 31, 20X7, FSP Corp should record a $30 debit (charge) in the OTTI-related component of OCI. FSP Corp should also disclose this as a component of AOCI, as required by ASC 220-10-45-14 through ASC 220-10-45-14A (see FSP 4.5). The credit-related OTTI charge of $10 should be classified as a realized loss in net income, and the new amortized cost basis of the security is $90.

At March 31, 20X8, there are no additional impairments to the security, as the fair value increased period-over-period. A $4 credit should be included in the OTTI-related component of OCI. The disclosure of AOCI components should show a $26 debit balance in the OTTI-related component of AOCI.

Question FSP 9-1 addresses the current period presentation of an increase in the fair value and an increase in expected credit losses of a previously other-than-temporarily impaired AFS debt security.

A reporting entity should recognize a realized loss for a subsequent increase in expected credit losses for a previously other-than-temporarily impaired AFS debt security. The realized loss is offset by a corresponding reduction in the previous non-credit OTTI recognized in OCI. That is, even though on a comprehensive income basis there is no additional impairment, the nature of the impairment has changed between the credit loss portion and the non-credit loss portion of the total OTTI amount.

EXAMPLE FSP 9-4
Subsequent increase in the fair value of a previously other-than-temporarily impaired AFS debt security with an increase in expected credit losses

At December 31, 20X7, FSP Corp has an AFS debt security with a $100 amortized cost basis and a fair value of $60. FSP Corp assesses whether the impairment is other-than-temporary. It determines that it does not intend to sell the security and it is not more likely than not that it will be required to sell the security. However, based on an evaluation of all available information, including a discounted cash flow analysis, FSP Corp does not expect to recover the entire amortized cost basis of the security (i.e., the present value of the amounts expected to be collected is less than amortized cost basis). This impairment is considered other-than-temporary and comprises a $10 credit-related impairment and a $30 non-credit-related component.

At March 31, 20X8, the AFS debt security has a fair value of $64 and an additional $5 of credit-related impairment.

What is the impact on OCI and the income statement presentation of this AFS security for the quarter ended March 31, 20X8?

In accordance with ASC 320-10-45-8A, the income statement presentation for the quarter ended March 31, 20X8 should be as follows.

Because FSP Corp recognized the additional $5 of OTTI through net income (for the credit-related impairment), the new amortized cost basis of the security is $85.

The activity in comprehensive income for the quarter ended March 31, 20X8 consists of a $5 reclassification to net income and a $4 increase in fair value of the debt security.

AOCI balances would consist of the following component at March 31, 20X8.

This amount is calculated as the 20X5 $30 non-credit component of OTTI less the $5 reclassification from OCI to net income in 20X6 and the $4 unrealized gain recognized in 20X8. It equals the new amortized cost basis of $85 less fair value of $64.

Further, FSP Corp should also disclose the total OTTI recognized in AOCI of $30 at December 31, 20X7 and $25 at March 31, 20X8 in accordance with ASC 320-10-50-2(aaa).