> Implementation Guidance
> > Information Considered When Estimating Credit Losses
326-30-55-1 There are numerous factors to be considered when estimating in determining whether a credit loss exists and the period over which the debt security is expected to recover. The length of time a security has been in an unrealized loss position should not be a factor, by itself or in combination with others, that an entity would use to conclude that a credit loss does not exist. The following list is not meant to be all inclusive. All of the following factors shall should be considered:
a. The length of time and the extent to which the {add glossary link to 2nd definition}fair value{add glossary link to 2nd definition} has been is less than the {add glossary link}amortized cost basis{add glossary link}
b. Adverse conditions specifically related to the security, an industry, or geographic area; for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed {add glossary link to 1st definition}debt security{add glossary link to 1st definition}, changes in the financial condition of the underlying {add glossary link to 2nd definition}loan{add glossary link to 2nd definition} obligors.
Examples of those changes include any of the following:
1. Changes in technology
2. The discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security
3. Changes in the quality of the credit enhancement.
c. The historical and implied volatility of the fair value of the security d.c. The payment structure of the debt security (for example, nontraditional
loan terms as described in paragraphs 825-10-55-1 through 55-2 and
163 310-10-50-25) and the likelihood of the issuer being able to make payments that increase in the future
e.d. Failure of the issuer of the security to make scheduled interest or principal payments
f.e. Any changes to the rating of the security by a rating agency
g. Recoveries or additional declines in fair value after the balance sheet date. [Content amended as shown and moved from paragraph 320-10-35-33F]
326-30-55-2 In making its other-than-temporary impairment assessment, an An entity shall should consider all available information relevant to the collectibility of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected. That information shall should include all of the following:
a. The remaining payment terms of the security b. Prepayment speeds
c. The financial condition of the issuer(s) d. Expected defaults
e. The value of any underlying collateral. [Content amended as shown and moved from paragraph 320-10-35-33G]
326-30-55-3 To achieve the objective in the preceding paragraph 326-30-55-2, the entity shall should consider, for example, all of the following to the extent they influence the estimate of expected cash flows on a security:
a. Industry analyst reports and forecasts b. Sector creditCredit ratings
c. Other market data that are relevant to the collectibility of the security.
[Content amended as shown and moved from paragraph 320-10-35-33H]
326-30-55-4 An entity also shall should consider how other credit enhancements affect the expected performance of the security, including consideration of the current financial condition of the guarantor of a security (if the guarantee is not a separate contract as discussed in paragraph 326-30-35-5 320-10-35-23), the willingness of the guarantor to pay, and/or whether any subordinated interests are capable of absorbing estimated losses on the loans underlying the security.
The remaining payment terms of the security could be significantly different from the payment terms in prior periods (such as for some securities backed by nontraditional loans; see paragraph 825-10-55-1). Thus, an entity shall should consider whether a security backed by currently performing loans will continue to perform when required payments increase in the future (including balloon payments). An entity also shall should consider how the value of any collateral would affect the expected performance of the security. If the fair value of the
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collateral has declined, an entity shall should assess the effect of that decline on the its ability of the entity to collect the balloon payment. [Content amended as shown and moved from paragraph 320-10-35-33I]
> Illustrations
> > Example 1: Identifying Purchased Financial Assets with Credit Deterioration
326-30-55-5 This Example illustrates one way an entity may identify purchased financial assets with credit deterioration.
326-30-55-6 Entity A purchases a portfolio of debt securities with varying levels of credit quality that it classifies as available for sale. When determining which individual available-for-sale debt securities should be considered to be in the scope of the guidance for purchased financial assets with credit deterioration, Entity A considers the indicators of impairment in paragraph 326-30-55-1. Entity A also considers its practices for identifying credit losses on available-for-sale debt securities. If Entity A determines that, on an individual basis, the purchased debt securities are purchased financial assets with credit deterioration, it should classify them as such.
326-30-55-7 Entity A also considers the securities that are within the scope of Subtopic 325-40 on beneficial interests in securitized financial assets. Entity A purchases a residual tranche and determines that there is a significant difference between contractual cash flows and expected cash flows. In accordance with paragraph 325-40-30-1A(a), Entity A applies the accounting for purchased financial assets with credit deterioration to the residual tranche.
> > Example 32: Disclosures about Investments in Available-for-Sale Debt Securities in an Unrealized Loss Position with No Credit Losses Reported That Are Not Other-Than-Temporarily Impaired
326-30-55-8 This Example illustrates the guidance in Section 326-30-50 320-10-50 with a table followed by illustrative narrative disclosures. The following table shows the gross unrealized losses and fair value of Entity B’s A’s investments with unrealized losses that are not deemed to have credit losses be other-than-temporarily impaired (in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 20X3. This Example illustrates the application of paragraphs 326-30-50-4 through 50-6 320-10-50-6 through 50-8 and, in doing so, describes Entity B’s the investor’s rationale for not recognizing reporting all or a portion of unrealized losses presented in the table as credit losses other-than-temporary impairments. In the application of paragraph 326-30-50-4(b) 320-10-50-6(b), Entity B the investor shall should provide meaningful disclosure about individually significant unrealized losses. To facilitate the narrative disclosures
165 and for simplicity, this Example presents only the quantitative information as of the date of the latest statement of financial position. However, pursuant to in accordance with paragraphs 326-30-4 through 6 320-10-6 through 50-8, that information is required as of each date for which a statement of financial position is presented, except in the period of initial application of the other-than-temporary impairment guidance in this Subtopic.
Description of Securities U.S. Treasury obligations and direct
obligations of U.S. government
Less Than 12 Months 12 Months or Greater Total
[Content amended as shown and moved from paragraph 320-10-55-22]
326-30-55-9 Following are illustrative narrative disclosures that would follow the illustrative table.
U.S. Treasury obligations. The unrealized losses on Entity B’s A’s investments in U.S. Treasury obligations and direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because Entity B A does not intend to sell the investments and it is not more likely than not that Entity B A will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Entity A does not consider those investments to be other-than-temporarily impaired at December 31, 20X3.
Federal agency mortgage-backed securities. The unrealized losses on Entity B’s A’s investment in federal agency mortgage-backed securities were caused by interest rate increases. Entity B A purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of Entity B’s A’s investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because Entity B A does not intend to sell the investments and it is not more likely than not that Entity B A will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Entity A does not consider those investments to be other-than-temporarily impaired at December 31, 20X3.
Corporate bonds. Entity B’s A’s unrealized loss on investments in corporate bonds relates to a $150 investment in Entity C’s B’s Series C Debentures. Entity C B is a manufacturer. The unrealized loss was primarily caused by a recent decrease in profitability and near-term profit forecasts by industry analysts resulting from intense competitive pricing pressure in the manufacturing industry
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and a recent sector downgrade by several industry analysts. The contractual terms of those investments do not permit Entity C B to settle the security at a price less than the amortized cost basis of the investment. While Entity C’s B’s credit rating has decreased from A to BBB (Standard & Poor’s), Entity B A currently does not expect Entity C B to settle the debentures at a price less than the amortized cost basis of the investment (that is, Entity B A expects to recover the entire amortized cost basis of the security). Because Entity B A does not intend to sell the investment and it is not more likely than not that Entity B A will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider the investment in Entity B’s debentures to be other-than-temporarily impaired at December 31, 20X3.
[Content amended as shown and moved from paragraph 320-10-55-23]