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 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

OTTI Approach (Prior to Adoption of CECL)

CECL Approach

Loss recognition “triggers” or thresholds

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:

  • If management intends (or is required) to sell the security, the OTTI amount recognized in earnings equals the entire difference between the security’s fair value and amortized cost basis.
  • Otherwise, the OTTI amount representing the credit loss is recognized in net income, and the amount related to all other factors is recognized in other comprehensive income-OCI, net of tax.

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.

  • The previous amortized cost basis less the OTTI “discount” becomes the new amortized cost basis of the investment.
  • If subsequent recoveries of credit losses occur, the OTTI “discount” is accreted into interest income.

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).