FASB Changes Investment Impairment Criteria
Recently, the Financial Accounting Standards Board (FASB) issued FASB Staff Position EITF Issue No. 99-20-a, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets . The purpose of this staff position was to amend EITF 99-20 to achieve a more consistent determination of other than temporary impairment on debt securities that are either held to maturity or available for sale.
Effectively, EITF 99-20 covers securitized financial instruments (mortgage backed securities, collateralized debt obligations, and similar instruments) that are not of high credit quality. Such instruments are deemed to be of high credit quality if they are backed by the U.S. government, one of its agencies, or are so well collateralized that the possibility of loss is remote. These high credit quality instruments, along with all other debt securities, should be evaluated for impairment under the provisions of FASB Statement 115 (FAS 115).
Prior to the amendment of EITF 99-20, the main difference between the other than temporary impairment analysis performed under EITF 99-20 versus FAS 115 was the fact that under EITF 99-20 the analysis of future cash flows had to be performed using market estimates of cash flows. FAS 115 allows the holders of securities to use their own estimates of future cash flows, not the market estimates.
As a result of the amendment, debt instruments covered by either EITF 99-20 or FAS 115 will both now follow the same rules and use the security holder’s estimate of cash flows when evaluating for other than temporary impairment. This change is significant because FAS 115, for purposes of assessing other than temporary impairment, requires the assessment of whether it is probable that all amounts due can be collected as contractually due. For institutions that are able to hold their securities until maturity, the results of this test may be significantly different from relying on the current market assessment of cash flows.
Effectively, EITF 99-20 covers securitized financial instruments (mortgage backed securities, collateralized debt obligations, and similar instruments) that are not of high credit quality. Such instruments are deemed to be of high credit quality if they are backed by the U.S. government, one of its agencies, or are so well collateralized that the possibility of loss is remote. These high credit quality instruments, along with all other debt securities, should be evaluated for impairment under the provisions of FASB Statement 115 (FAS 115).
Prior to the amendment of EITF 99-20, the main difference between the other than temporary impairment analysis performed under EITF 99-20 versus FAS 115 was the fact that under EITF 99-20 the analysis of future cash flows had to be performed using market estimates of cash flows. FAS 115 allows the holders of securities to use their own estimates of future cash flows, not the market estimates.
As a result of the amendment, debt instruments covered by either EITF 99-20 or FAS 115 will both now follow the same rules and use the security holder’s estimate of cash flows when evaluating for other than temporary impairment. This change is significant because FAS 115, for purposes of assessing other than temporary impairment, requires the assessment of whether it is probable that all amounts due can be collected as contractually due. For institutions that are able to hold their securities until maturity, the results of this test may be significantly different from relying on the current market assessment of cash flows.
