AFS Impairment Methodology Diagram -- Accessible Version

The AFS impairment methodology diagram can be summarized as follows:

If the answer to the question, "Is the fair value of the security less than its amortized cost?" is no, there is no impairment (i.e., no write-down or allowance for credit losses). If the answer to the question, "Is the fair value of the security less than its amortized cost?" is yes, determine if the institution intends to sell the security.

If the institution intends to sell the security, any previously recognized allowance for credit losses is written off and the security's amortized cost basis is written down to fair value, through earnings.  If the institution does not intend to sell the security, determine whether it is more likely than not the institution will be required to sell the security before recovery of its amortized cost basis.

If it is more likely than not the institution will be required to sell the security before recovery of its amortized cost basis, any previously recognized allowance for credit losses is written off and the security's amortized cost basis is written down to fair value, through earnings.  If the answer to the question, "Is it more likely than not the institution will be required to sell the security before recovery of its amortized cost basis?" is no, Determine if the decline in fair value has resulted from a credit loss or other factors. Recognize an allowance for credit losses by a charge to earnings for the credit-related component of the decline in fair value (subject to fair value floor). Recognize in other comprehensive income (OCI) the noncredit-related component of the fair value decline (if any).

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Last Update: December 27, 2016