On May 14, the Office of Thrift Supervision, which regulates savings banks and their holding companies, issued a CEO Bulletin (Bulletin) that alerts institutions to the recent change to generally accepted accounting principles (GAAP) with respect to available-for-sale and held-to-maturity debt securities. The Bulletin highlights new other-than-temporary impairment (OTTI) accounting guidance issued on April 9 by the Financial Accounting Standards Board (FASB) for debt securities .
Under FASB Staff Position (FSP) FAS 115-2, an impairment for debt securities, in certain circumstances, is separated into the credit loss amount recognized in earnings and the amount related to all other factors (non-credit loss) recognized in other comprehensive income, net of applicable taxes. Under FSP FAS 115-2
- If (i) an institution intends to sell the debt security, or (ii) it is “more likely than not” that it will be required to sell the security before recovery of its amortized cost basis (less any current-period credit loss), OTTI equal to the entire difference between the security’s amortized cost basis and its fair value shall be recognized in earnings.
- If, however, (i) an institution does not intend to sell the debt security, and (ii) it is not “more likely than not” that the institution will be required to sell the security before recovery of its amortized cost basis (less any current-period credit loss), and (iii) it does not expect to recover the entire amortized cost basis, the OTTI shall be separated and recognized as follows:
- The credit loss amount shall be recognized in earnings.
- The non-credit loss shall be recognized in other comprehensive income (OCI), net of applicable taxes.
The Bulletin reminds management and examination staff that the regulatory capital treatment of losses on debt securities has not changed, noting that the new accounting guidance may result in a different amount of non-credit losses on available-for-sale and held-to-maturity debt securities being recognized in OCI instead of earnings. The non-credit losses in accumulated OCI will be added back as part of unrealized losses in determining Tier 1 capital on Thrift Financial Report Schedule Consolidated Capital Requirement. The Bulletin also states that each quarter, management is responsible for ensuring that each security’s fair value is measured consistent with GAAP and also documenting whether impairment is temporary or other-than-temporary.