Impairments ECL Scenarios for US GAAP

The following scenarios describe ledger entries for impairments when you use asset-level expected credit loss (ECL) with a GAAP accounting basis. 

About Impairments and Asset-Level ECL

When you use asset-level ECL, you can process any impairment of the asset using the Book Impairment Adjustment panel. The impairment event checks to see if there is an expected credit loss on the lot and reduces the expected credit loss accordingly.

Note that because you book ECL onto the system at the lot level, you must set the Impairment Processing Flag field on the panel to a value of Lot in order to reduce ECL as part of the impairment. If you set the Impairment Processing Flag to a value of Position, the system does not reduce any ECL on the lot.

Impairment for GAAP – AFS

On 1 January 2020, the entity purchases one lot of a loan-backed security, par of 1,000 and a cost of $900. The lot subsequently has an expected credit losses of $30 and Non-Credit loss of $40 applied to it (that is, the present value is deemed to be $870, the market value is $830).

This security is deemed to be impaired. You books a writedown transaction against the lot. The new amortized cost is $880 so the writedown is for ($900 - $820 = $20).

The following ledger entries are booked.

Non-credit balance should be reversed completely.

This security is deemed to be impaired. You book a writedown transaction against the lot. The new amortized cost is $850 so the writedown is for ($900 - $850 = $50).

The following ledger entries are booked. The writedown first reduces the Allowance for ECL and any excess is recoded as an impairment expense. The entire amount of the writedown reduces the Cost of Investment.

Non-credit balance should be reversed completely.

In each case, the Expected Credit Loss offsets to Cost until no ECL remains, any remaining amount offsets to Realized Losses – Impairments.

Impairment for GAAP – HTM

On 1 January 2020, the entity purchases one lot of a loan-backed security, par of 1,000 and a cost of $900. The lot subsequently has an expected credit losses of $30 applied to it.

This security is deemed to be impaired. You book a writedown transaction against the lot. The new amortized cost is $880 so the writedown is for ($900 - $880 = $20).

The following ledger entries are booked.

This security is deemed to be impaired. You book a writedown transaction against the lot. The new amortized cost is $850 so the writedown is for ($900 - $850 = $50). The writedown first reduces the Allowance for ECL and any excess is recoded as an impairment expense. The entire amount of the writedown reduces the Cost of Investment.

The following ledger entries are booked.