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CECL and Debt Securities

As a methodology, CECL applies to all financial instruments carried at amortized cost, including loans held-for-investment, net investment in leases, and held-to- maturity (HTM) debt securities. CECL does not apply to trading assets, loans held for sale, financial assets for which the fair value option has been elected, or loans and receivables between entities under common control.  However, the financial accounting standard, ASU 2016-13 (Topic 326), that issued CECL also introduced additional enhancements to existing practice. One of these eliminated other than temporary impairment (OTTI) for available-for-sale securities.

   

Loans 

Debt Securities 

CECL        

Held for Investment 

Held to Maturity (HTM)

NON-CECL 

Held for sale 

Lower of amortized cost or fair value**    

Available-for-sale

NEW AFS credit loss model*

Trading

Future value-net income (FV-NI)**

*Under the new credit loss model for AFS, losses will be reflected for differences between debt security’s amortized cost basis and its fair value (lower of cost or market (LOCOM)) when identified for sale. In developing a new credit loss model for AFS, FASB decided that the “other-than-temporary” concept should no longer exist and that the net amortized cost of an AFS security should not be less than its fair value.

**No change to Generally Accepted Accounting Principles (GAAP).

Under CECL, for debt securities classified as HTM:

  • Expected credit losses are recorded in a separate allowance for credit loss (ACL) account, rather than as direct write-downs of a security’s cost basis. If subsequent recoveries in credit occur, this allowance is reversed through the provision for credit losses (not accreted into interest income).
  • The recognition of losses is not based on a triggering event. Therefore, there are no delays in credit loss recognition.
  • Allowance is not required when there is “zero” expected credit losses (e.g., U.S. Treasuries).

Other considerations of CECL that are discussed at greater length on other pages of this website, such as historical loss records, ‘Q’ factors and reasonable and supportable forecasts apply to securities held at amortized cost. These considerations should be applied by the institution to securities in a reasonable and appropriate manner with adequate documentation and appropriate risk management practices.

The CECL credit loss approach will not apply to debt securities classified as AFS. Instead, the FASB made targeted changes to GAAP that eliminate the concept of OTTI and requires credit losses on AFS debt securities to be recorded in an allowance account.

  • The modified AFS debt security impairment methodology also limits the amounts recorded in the ACL to the excess of the amortized cost over the fair value of the security (i.e., maximum loss = amount underwater).