FSP 115-2 Amends FAS 157

On April 9, 2009, the FASB released FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2”), which amends current guidance on measuring other-than-temporary impairment (OTTI) of debt securities classified as held-to-maturity or available-for-sale. For most companies, FSP 115-2 must be adopted in the second quarter. IMPACT: BIFURCATION FSP 115-2 relaxes the other-than-temporary indicator by moving from “intent to hold” to the less restrictive “don’t intend to sell”. This should provide all companies slightly more flexibility in avoiding OTTI treatment. Companies that assert no intention to sell should be careful when soliciting bids, as such activity may appear to be a contradiction in intentions. The real impact, however, is the requirement to reclassify certain losses from the income statement to the balance sheet. For previously recognized OTTIs, the credit component of OTTIs will remain in earnings, whereas the non-credit component will be reclassified to OCI. New OTTIs recognized in the second quarter will need to be split as well. In performing this bifurcation, companies are required to consider their best estimate of the present value of cash flows expected to be collected from the debt security. However, the FSP does not require an explicit approach for accomplishing this. RECAP Under the old rules, in order for a company to conclude that an impairment was not other-than-temporary, they had to evaluate duration, magnitude and intent to hold. As part of that analysis, a holder needed to express the positive intent and ability to hold the impaired security until it recovered in order to conclude that the impairment was temporary. This FSP replaces the“intent to hold” concept with a “don’t-intend-to sell”concept, under which a company must assert that it does not intend to sell an impaired debt security and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis to conclude that an impairment is temporary. An OTTI occurs when there is intent to sell an impaired debt security, or, it is more likely than not it will be required to be sold prior to recovery of amortized cost. The amount of OTTI recognized in earnings is the difference between amortized cost and fair value. The fair value of the new investment becomes the new cost basis and would not be adjusted upwards for future recoveries in value. When a company does not intend to sell an impaired debt security, and, it is not more likely than not it will be required to sell prior to recovery, the company must determine whether it will recover the amortized cost. If full recovery is not expected, the OTTI is bifurcated between the credit loss, which is recognized in earnings, and non-credit loss, which is recognized in OCI.