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Available-for-sale (AFS) debt securities are not within the scope of the current expected credit loss (CECL) model. ASC 326-30 provides a different impairment model that is a modified version of the other-than-temporary impairment (OTTI) model prescribed by prior GAAP. The new AFS debt security model differs from the prior OTTI model in that it no longer allows consideration of the length of time during which the fair value has been less than its amortized cost basis when determining whether a credit loss exists. The concept of OTTI is no longer relevant under ASC 326-30. The recognition and measurement of impairment will differ between the CECL model and the AFS debt security impairment model.
An AFS debt security is impaired if its fair value is below its amortized cost basis (excluding fair value hedge accounting adjustments from active portfolio layer method hedges). A reporting entity must consider if it intends to sell a security or will more likely than not be required to sell a security before recovery of its amortized cost basis.
This chapter discusses the application of the AFS debt security impairment model in accordance with ASC 326-30. Figure LI 8-1 illustrates where additional information on AFS debt securities can be found within this guide.
Figure LI 8-1
Location of additional information on AFS debt securities
Topic
Location of discussion in guide
Classification of AFS debt securities
Application of the AFS impairment model to purchased financial assets with more than insignificant credit deterioration
Presentation and disclosure requirements

8.1.1 Portfolio layer method

The portfolio layer method permits reporting entities to designate the portion of a closed portfolio of certain financial assets, beneficial interests secured by financial assets, or a combination of the two, that is not expected to be prepaid during the hedge period as the hedged item in a fair value hedge of interest rate risk. Although the portfolio layer method (originally referred to as the last-of-layer model) was designed considering prepayable mortgage loans or mortgage-backed securities, it may be applicable to other assets as well. The guidance allows an entity to essentially ignore prepayment risk in the hedge relationship even when prepayable assets are present in the closed portfolio. It does so by permitting designation of the portion of the pool not expected to be prepaid, defaulted, or sold as the hedged item.
Fair value hedge accounting basis adjustments on active portfolio layer method hedges should not be considered when determining if an available security is impaired. However, consistent with the guidance in ASC 815-25-35-6, the basis adjustment associated with AFS securities would result in an adjustment to the amount recorded in AOCI for those securities. For AFS securities subject to fair value hedges, changes in the fair value of the security for the risk hedged are recognized in earnings as opposed to AOCI.
An active portfolio layer method hedge is an existing hedge relationship designated under the portfolio layer method hedging strategy in ASC 815. Basis adjustments associated with dedesignated portfolio layer method hedges should be considered when determining if an available security is impaired.

ASC 815-25-35-6

If a hedged item is otherwise measured at fair value with changes in fair value reported in other comprehensive income (such as an available-for-sale debt security), the adjustment of the hedged item’s carrying amount discussed in paragraph 815-25-35-1(b) shall be recognized in earnings rather than in other comprehensive income to offset the gain or loss on the hedging instrument. If the hedged item is a hedged layer designated in a portfolio layer method hedge on a closed portfolio in accordance with paragraph 815-20-25-12A and the closed portfolio includes only available-for-sale debt securities, the entire gain or loss (that is, the change in fair value) on the hedged item attributable to the hedged risk shall be recognized in earnings rather than in other comprehensive income to offset the gain or loss on the hedging instrument. If the closed portfolio includes available-for-sale debt securities and assets that are not available-for-sale debt securities, an entity shall determine the portion of the change in fair value on the hedged item attributable to the hedged risk associated with the available-for-sale debt securities using a systematic and rational method. That amount shall be recognized in earnings rather than in other comprehensive income. However, an entity shall not adjust the carrying amount of the individual available-for-sale debt securities included in the closed portfolio in accordance with paragraph 815-25-35-1(c).

ASC 815-25-35-10

An asset or liability that has been designated as being hedged and accounted for pursuant to this Section remains subject to the applicable requirements in generally accepted accounting principles (GAAP) for assessing impairment or credit losses for that type of asset or for recognizing an increased obligation for that type of liability. Those impairment or credit loss requirements shall be applied after hedge accounting has been applied for the period and the carrying amount of the hedged asset or liability has been adjusted pursuant to paragraph 815-25-35-1(b). A portfolio layer method basis adjustment that is maintained on a closed portfolio basis for an existing hedge in accordance with paragraph 815-25-35-1(c) shall not be considered when assessing the individual assets or individual beneficial interest included in the closed portfolio for impairment or credit losses or when assessing a portfolio of assets for impairment or credit losses. An entity may not apply this guidance by analogy to other components of amortized cost basis. Because the hedging instrument is recognized separately as an asset or liability, its fair value or expected cash flows shall not be considered in applying those impairment or credit loss requirements to the hedged asset or liability.

ASC 815-25-35-11

This Subtopic implicitly affects the measurement of credit losses under Subtopic 326-20 on financial instruments measured at amortized cost by requiring the present value of expected future cash flows to be discounted by the new effective rate based on the adjusted amortized cost basis in a hedged loan. Paragraph 326-20-55-9 requires that, when the amortized cost basis of a loan has been adjusted under fair value hedge accounting, the effective rate is the discount rate that equates the present value of the loan’s future cash flows with that adjusted amortized cost basis. That paragraph states that the adjustment under fair value hedge accounting for changes in fair value attributable to the hedged risk under this Subtopic shall be considered to be an adjustment of the loan’s amortized cost basis. As discussed in that paragraph, the loan’s original effective interest rate becomes irrelevant once the recorded amount of the loan is adjusted for any changes in its fair value. Because paragraph 815-25-35-10 requires that the loan’s amortized cost basis be adjusted for hedge accounting before the requirements of Subtopic 326-20 are applied, this Subtopic implicitly supports using the new effective rate and the adjusted amortized cost basis. A portfolio layer method basis adjustment that is maintained on a closed portfolio basis for an existing hedge in accordance with paragraph 815-25-35-1(c) shall not adjust the amortized cost basis of the individual assets or individual beneficial interest included in the closed portfolio. An entity may not apply this guidance by analogy to other components of amortized cost basis.

ASC 815-25-35-12

This guidance applies to all entities applying Subtopic 326-20 to financial assets that are hedged items in a fair value hedge, regardless of whether those entities have delayed amortizing to earnings the adjustments of the loan’s amortized cost basis arising from fair value hedge accounting until the hedging relationship is dedesignated. The guidance on recalculating the effective rate is not intended to be applied to all other circumstances that result in an adjustment of a loan’s amortized cost basis and is not intended to be applied to the individual assets or individual beneficial interest in an existing portfolio layer method hedge closed portfolio.

ASC 326-30-35-1A

An entity shall not consider a basis adjustment related to an existing portfolio layer method hedge designated in accordance with paragraph 815-20-25-12A when measuring impairment of the individual investments or individual beneficial interest included in a closed portfolio hedged using the portfolio layer method

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