A debt or equity investment is impaired if its fair value is less than its amortized cost basis. If that happens, a bank must determine whether the impairment is other than temporary. Factors to consider in making this determination include:
• The length of time the security’s fair value has been below its carrying amount,
• The issuer’s near-term prospects, and
• The bank’s intent and ability to hold the investment long enough to allow for any anticipated recovery in value.
• The length of time the security’s fair value has been below its carrying amount,
• The issuer’s near-term prospects, and
• The bank’s intent and ability to hold the investment long enough to allow for any anticipated recovery in value.
USGAAP
Trigger - when fair value lower than cost
(1) If the security is likely to be sold, the TOTAL amount of OTTI is written down and recognized in earnings
(2) If it’s not likely to be sold AND does not expect recovery of the cost basis, ONLY the credit component of OTTI — that is, the loss attributable to the issuer’s inability or unwillingness to pay — is recognized in earnings. The noncredit component — which reflects losses caused by illiquidity, fluctuating interest rates or other factors — is recognized as other comprehensive income (OCI)
how to calculate the credit-related OTTI: use original effective interest rate and best estimate of cash flows to calculate present value
IFRS
Trigger - objective evidence of impairment - consider different events
e.g. fluctuation of interest rate, credit rating downgrade alone may not be triggering event
Once determined impaired, cumulative loss recognized in OCI will be released to earnings
Reversal of impairment under both standards
equity - both prohibited
debt - prohibited (USGAAP); allowed (IFRS)
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