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:
- The entity/basis is classified as available for sale or held-to-maturity, and
- 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.
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