SEC Staff Accounting Bulletin Syncs Up Impairment Rules

The staff of the Securities and Exchange Commission has published a new staff accounting bulletin regarding impairment to make its accounting literature consistent with recent pronouncements on impairment from the Financial Accounting Standards Board.

Staff Accounting Bulletin No. 111 amends an earlier staff accounting bulletin titled “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities (Topic 5.M).” The effect of the new SAB is to eliminate debt securities from the scope of the earlier SAB, making it consistent with FASB’s recently issued staff position on other-than-temporary impairment of debt securities.

FASB’s staff position provides new and controversial guidance for assessing whether an impairment of a debt security is something other than temporary, giving management some latitude to consider plans to hold a security to recovery in establishing its value and recording related losses. The guidance allows management to split certain debt-security losses into a credit-related loss that would be charged to earnings and a non-credit-related loss that would be charged to other comprehensive income, which does not impact the income statement.

SEC staff notes that the new SAB does not change the staff’s previous views on equity securities. It also points out that for equity securities classified as available for sale, the staff does not believe the phrase “other than temporary” should be interpreted to mean permanent. “The staff believes that FASB consciously chose the phrase ‘other than temporary’ because it did not intend that the test be ‘permanent impairment,’ as has been used elsewhere in accounting practice,” the SAB says.

The staff says the value of investments in available-for-sale equity securities may trail off for any number of reasons, and it’s up to management to consider “all available evidence” to evaluate the prospects for recovery. It should consider factors such as how low market value has sunk below cost and how long it’s been there, how well situated an entity is to carry the loss, and how committed it is to holding the investment to recovery, among other things.