Chapter 7 — Available-for-Sale Debt Securities

7.1 Introduction

The CECL model does not apply to AFS debt securities. Instead, the FASB decided to make targeted improvements to the OTTI model in ASC 320 for AFS debt securities to eliminate the concept of “other than temporary” from that model. Although the Board originally sought to develop an expected credit losses model that would apply similarly to loans and debt securities, feedback received from stakeholders throughout the model’s development indicated that an entity manages AFS debt securities differently from how it manages other assets measured at amortized cost (e.g., loans and HTM debt securities). Accordingly, in paragraph BC81 of ASU 2016-13, the Board indicates that “the same credit loss model cannot apply because there are different measurement attributes. The measurement attribute for available-for-sale debt securities necessitates a separate credit loss model because an entity may realize the total value of the securities either through collection of contractual cash flows or through sales of the securities.”

The targeted changes to the OTTI model can be summarized as follows (see Section 7.2.3.1 for more information):

The entity must use an allowance approach (as opposed to permanently writing down the security’s cost basis).
The entity must limit the allowance to the amount at which the security’s fair value is less than its amortized cost basis.
The entity may not consider the length of time fair value has been less than amortized cost.
The entity may not consider recoveries in fair value after the balance sheet date when assessing whether a credit loss exists.

These targeted changes do not apply to an AFS debt security if (1) the entity intends to sell the security or (2) it is more likely than not that the entity will be required to sell the security before the recovery of the security’s amortized cost basis. In such cases, the entity would write down the debt security’s amortized cost to its fair value. The decision tree below illustrates how an entity identifies and assesses impairment on AFS debt securities.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.