Recognition and Measurement – CECL for Held-to-Maturity (HTM) Debt Securities
The following table summarizes the differences between other than temporary impairment (OTTI) and CECL approaches for HTM debt securities.
Accounting Concept |
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CECL Approach |
Loss recognition “triggers” or thresholds
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Losses are recorded when (1) a security’s fair value has declined below its amortized cost basis and (2) the impairment is deemed other-than-temporary. |
Losses are recorded immediately (i.e., on day one). No triggers for recognizing losses. |
Credit loss recognition approach |
Write-down approach. OTTI loss is recognized as a direct write-down of the impaired security’s amortized cost basis. |
Allowance approach. Expected credit loss is recognized separately as an allowance for credit loss (ACL) (i.e., a contra-account). The amortized cost basis of the security is not adjusted. |
Unit of measurement |
Individual debt security |
Collective basis (i.e., pooled basis) unless the securities do not have similar risk characteristics. |
Acceptable methods of measuring credit losses |
One method required: Discounted cash flows (DCF) method |
DCF method required for certain beneficial interests in securitized assets. Various methods permitted for other types of debt securities, including DCF, loss rate, pass due, loss given default (LGD), and others. |
Credit loss amounts recognized in earnings |
Varies based on intent and ability:
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Regardless of intent: Expected credit loss that reflects the risk of loss (even if that risk is remote) is recognized in earnings. |
Subsequent accounting for credit losses |
OTTI losses may not be directly reversed for subsequent recoveries in credit.
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Subsequent improvements in cash flows expectations will be recorded immediately in income (through reversal of previously established allowance) rather than as adjustments to interest income over the life of the instrument (i.e., results in an immediate increase to common equity tier 1 capital). |