About Impairments - U.S. GAAP

Other-than-temporary impairment (OTTI) is a term that denotes when it is determined that a lot must write off a loss in market value. Considerations include current market value, conditions of the issuer of the security, and the intent and ability of the investor to hold the securities until recovery.

For U.S. GAAP, if the fair value of a debt security is less than the amortized cost, the entity recognizes the OTTI if:

1. The entity/basis is classified as available for sale or held-to-maturity, and
2. The entity has the intent to sell the debt security or more likely than not the entity is required to sell the debt security before its anticipated recovery.

The amount of impairment related to credit and non-credit is recognized in earnings.

If the available-for-sale or held-to-maturity entity does not have the intent to sell the debt security or it is not more likely than not that the entity will sell the debt security before its recovery, the impairment is separated into the following:

• The amount of the impairment related to the credit loss, which is recognized in earnings, and
• The amount of non-credit OTTI, which is recognized in Other Comprehensive Income (OCI).

For an entity/basis classified as available-for-sale, the non-credit OTTI is recorded separately from normal valuation processing in a contra-asset account and in an unrealized loss-impairment account in OCI.

For an entity/basis classified as held-to-maturity, the non-credit OTTI is also recorded in a contra-asset account and in an unrealized loss-impairment account in OCI. The unrealized loss-impairment/OCI account for held-to maturity securities is amortized over the remaining life of the debt security as an increase in the carrying value of the security. The amortization results in a reduction in the contra-asset and unrealized loss OCI accounts for non-credit losses.

When OTTIs are recorded for foreign denominated securities, Eagle Accounting recognizes the amount of the impairment in base currency based on the percentage of the amount of the impairment recognized in local currency to the current local amortized cost on the effective date of the impairment. For average cost portfolios, the base cost recognized as an impairment for foreign denominated securities is based on the percentage of the local cost recognized as an impairment to the total local amortized cost for all lots for that security.

For example, if 20% of local amortized cost is reduced for an impairment, 20% of amortized cost is recognized as an impairment.

About Credit and Non-Credit Loss for Debt Securities

The accounting bases you use affect your treatment of credit and non-credit loss for debt securities. For the U.S. GAAP accounting bases, the separately identified non-credit loss is not recognized as a realized loss but is reflected as a contra-asset to amortized cost and as a non-credit loss through Other Comprehensive Income (outside of earnings).

For the U.S. GAAP basis, If a debt security is classified as Available for Sale (AFS) or Held to Maturity (HTM) and there is intent to do either of the following: 1) Sell the debt security, 2) More likely than not be required to sell the debt before its full fair value, then the total impairment is recognized as a loss in earnings. If neither of the above is applicable regarding the potential sale of the security, then the OTTI may be bifurcated into credit-related and non-credit-related components:

• Credit Related. A credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on OTTI security falls below its amortized cost. This is recognized as a realized loss in earnings.
• Non-Credit Related. The non-credit-related component represents the remaining portion of the impairment due to other factors. This is recognized in OCI.

These requirements for credit/non-credit losses do not apply to equity securities.

In the Book Impairment Adjustment panel, you can specify credit/non-credit losses for fixed income holdings when you process an impairment. If you impair by amount, you can specify a Credit Loss Local Adjustment amount and a Non-Credit Loss Local Adjustment amount. If you impair by price or FX rate, you can specify a Credit Price and/or Noncredit Price value.

In close transactions, you can use the Prorata Noncredit Loss Reduction Flag (tag 16157) field to identify whether any noncredit loss associated with partial sells is reversed prorata. This option is found in fixed income close trade panels, the Add/Change Voluntary Corporate Action Election panel, and the interportfolio transfer panels. When you sell an impaired security and this option has a default value of No, the system fully reverses any non-credit loss related to the impairment. When you sell an impaired security and this option has a value of Yes, the system allows you to partially reverse any non-credit loss related to the impairment.

In the Book Impairment Adjustment panel, you can close out an existing non-credit amount with a reversal. For GAAP basis, subsequent impairments receive existing non-credit losses.

You can also use the Book Non Credit Loss Adjustment panel to directly adjust or fully/partially reverse the noncredit loss associated with a previously entered impairment.

Interportfolio Transfers and Non-Credit Loss

Non-credit losses are only moved on interportfolio transfers (IPTs) from the From security to the To security if the regulatory categories on the sending fund/account basis and the receiving fund/ accounting basis are a combination of Available for Sale (AFS) and Held to Maturity (HTM):

• HTM to HTM
• AFS to AFS
• AFS to HTM
• HTM to AFS

For all other combinations, the non-credit loss is closed out on the From security when the IPT/fund merger occurs.