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Weathering the ‘Other-Than-Temporary’ Impairment Storm

How to apply new FASB Staff Position EITF 99-20-1 properly to your investment securities.

February 2009
by Thomas Rees and Kenneth Fick/Journal of Accountancy

As if a recession, the credit crisis and the housing downturn were not causing enough stress, many companies, and their accountants and auditors, must also consider an accounting issue that has become increasingly pressing — should their investments be considered other-than-temporarily impaired? This issue is relevant not only for financial institutions but for any company that holds corporate debt, structured investment securities (CDOs (collateralized debt obligation), mortgage-backed and other asset-backed securities) or equities.

Some market analysts and members of the financial press have blamed U.S. GAAP’s (Generally Accepted Accounting Principles) fair value accounting requirements for exacerbating financial markets’ instability. Frequently, critics attribute the problem to the application of FASB Statement no. 157, Fair Value Measurements. However, Statement no.157 provides guidance on how to measure fair value, not when assets should be recorded at fair value.

The real controversy comes from accounting standards that require entities to measure certain assets or liabilities at fair value. During market downturns, the accounting requirements relating to recognition of impairment on investment securities become especially contentious. These rules require accountants to make subjective assessments in determining when impairment should be considered “other-than-temporary,” and if so, to write down the impaired asset to its fair value with a charge to current-period earnings. Companies are generally reluctant to take such impairment charges because once a new cost basis is established from the write-down, any subsequent appreciation in fair value of the impaired security may not be recognized until the security is sold. At the same time, the decision not to recognize impairment is subject to close scrutiny by analysts and regulators.

This article has been excerpted from the Journal of Accountancy. Read the full article here.