New Other-Than-Temporary Impairment (OTTI) Accounting Rules By: Robert Hamby, CPA Date: 8/13/09 In April 2009, the Financial Accounting Standards Board issued two FASB Staff Positions (FAS 115-2 and FAS 124-2) which change the recognition and presentation of Other-Than-Temporary Impairment (OTTI) items.  These FSPs are effective for interim and annual reporting periods ending after June 15, 2009. Previous Method Previous guidance for determining if impairment existed required an entity to assert that it had the intent and ability to hold the security for a period of time to allow for any anticipated recovery in fair value.  Recognition of impairment loss was included as a hit to earnings for the difference between the debt security’s amortized cost and its fair value at the measurement date. Updated Method        Identification Under the new guidance, for any investment security that has a fair value less than its amortized cost at the balance sheet date, an entity must assess whether the impairment is other than temporary.  The entity must assess whether it has the intent to sell the debt security, or, if it is more likely than not that the entity will be required to sell the debt security before its anticipated recovery (which could be due to working or regulatory capital requirements).  If either of these requirements exists, or the entity does not expect to recover the entire amortized cost basis of the security, an OTTI exists.  In assessing whether the entire amortized cost basis will be recovered, the present value of the cash flows expected to be collected from the security is compared with the amortized cost basis of the security.  Any deficiency is considered to be an other-than-temporary impairment referred to as a credit loss.         Recognition Once an impairment has been identified, the amount of impairment recognized in earnings depends on whether the entity intends to sell the security, or, if it is more likely than not that the entity will be required to sell the debt security before its anticipated recovery.  If the entity intends to sell, or, it is more likely than not that the entity will be required to sell the debt security before its anticipated recovery, the entire impairment amount (difference between the amortized cost and the fair value) is recognized against earnings.  If the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the debt security before its anticipated recovery, the amount of unrealized loss related to the credit loss (difference between present value of the cash flows expected to be collected from the security and the amortized cost) is recognized in earnings.  The remaining amount related to other factors should be recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the impairment recognized in earnings is the new amortized cost basis of the investment and the new amortized cost basis will not be adjusted for subsequent recoveries in fair value.        Going Forward On debt securities for which impairment is recognized in earnings, the bank should continue to estimate the present value of cash flows expected to be collected over the life of the security.  If significant cash flow increases are expected, or if actual cash flows are significantly greater, the difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted as interest income.  For debt securities classified as Held-to-Maturity (HTM) for which an impairment amount is recognized in other comprehensive income, this portion is accreted from other comprehensive income to the amortized cost of the security over its remaining life in a prospective manner on the basis of the amount and timing of future estimated cash flows.        Reporting The disclosures for recognition of OTTI in earnings have been expanded to include the methodology and significant inputs used to measure the amount related to the credit loss.  In addition, a roll forward showing information relating to OTTI recognized in earnings is also required.