The FASB just released a Proposed FASB Staff Position that would amend the other-than-temporary (OTT) impairment guidance in two FASB Statements (SFAS 115 and SFAS 124) and in EITF 99-20.  This Proposed FSP seems to make two big changes. 

The first relates to the conditions under which management can avoid considering an impairment to be OTT.  Currently, impairments are OTT if management does not have the intent or ability to hold an impaired security long enough for its value to recover.  The proposed FSP would shift from intent and ability to intent and probability, in that management would now need to assert that it does not intend to sell the impaired security and that it is (merely?) more likely than not that it will not have to sell the security prior to its recovery. 

The second change relates to how/when a recognized impairment finds its way onto the income statement.  Currently, OTT impairments are recognized in earnings in the period incurred.  This FSP would not change the measurement for impaired securities that management either intends to sell or will likely have to sell prior to their recovery.  Those OTT impairments will be recognized completely in earnings.  However, if the 2-pronged test is met, the Proposed FSP requires management to carve out of the impairment loss the credit loss component (which relates to the cash that would not be recovered if the impaired security were held to maturity).  This portion of the loss would be recognized in earnings, with the remaining loss recognized in other comprehensive income and amortized through earnings over the remaining life of the security.

In other words, if it is more likely than not that the entity will not sell an impaired debt security before recovery of its cost basis, but it is also probable that the investor will be unable to collect all amounts due according to the contractual terms of the security, then the security will be written down to fair value with the writedown split into its credit and non-credit components.  (In that case, if the decline in value were due solely to non-credit losses, then the entire loss would be recognized in OCI).

Proposed presentation in the income statement would be something like the following: 

Impairment losses on securities


Noncredit-related losses on securities not expected to be

sold (recognized in other comprehensive income)


( 4,500)

Net impairment losses

$ 5,500

The rule passed with a 3-2 vote, in part, because two board members believe that the FSP is likely to lead to fewer write-downs, resulting in delayed recognition of impairment losses in earnings.  They also question, among other things, whether bifurcating the fair value write-down into credit and non-credit components will be useful to investors and whether it is even practical to ask management to make such distinctions.

These are interesting and researchable questions. Personally, I am particularly interested in the question of whether users bifurcate losses (or gains, for that matter) into credit and non-credit components (or perhaps there are other distinctions that users find useful).  Does anyone know of relevant research that might speak to this issue or to the other questions posed in the FSP?