ASC 320 Investments - Debt and Equity Securities: Debt Security Impairment Transaction Explained with Journal Entries

Posted In | ASC Education | Gridlex Academy

Companies often invest in debt and equity securities as part of their investment strategies, which may be subject to fluctuations in value due to market conditions and other factors. ASC 320, Investments - Debt and Equity Securities, provides guidelines on accounting for investments in debt and equity securities, including the recognition, measurement, and presentation of impairment losses. In this article, we will focus on the impairment of debt securities and explain the associated transactions with relevant journal entries.

 

ASC 320: Investments - Debt and Equity Securities - Overview

ASC 320 classifies investments in debt and equity securities into three categories: trading, available-for-sale, and held-to-maturity. Each classification has different accounting treatments for unrealized gains and losses, as well as impairment considerations.
 

Debt Security Impairment

A debt security is considered impaired when its fair value falls below its amortized cost, which may be due to various factors such as credit risk, interest rate changes, or market conditions. An impairment loss should be recognized when the decline in fair value is considered to be other-than-temporary.

 

Other-than-temporary impairment (OTTI) occurs when a company has the intent to sell the impaired debt security, or it is more likely than not that the company will be required to sell the security before recovery of its amortized cost basis, or the company does not expect to recover the entire amortized cost basis of the security.

 

Journal Entries for Debt Security Impairment

To illustrate the accounting treatment of debt security impairment, let's consider the following example:

 

ABC Company holds a debt security classified as available-for-sale with an amortized cost of $100,000. The fair value of the security has declined to $85,000, and ABC Company determines that the decline in fair value is other-than-temporary.

 

Journal entries for recognizing the impairment loss would be:

     Recognition of Impairment Loss:

     Dr. Impairment Loss: $15,000

     Cr. Available-for-Sale Debt Security: $15,000

 

The impairment loss of $15,000 is calculated as the difference between the amortized cost ($100,000) and the fair value ($85,000) of the debt security. The company recognizes the impairment loss in the income statement for the period in which the impairment is identified, and the carrying value of the available-for-sale debt security is reduced by the amount of the impairment loss.

 

     Reclassification of Accumulated Losses:

     Dr. Accumulated Other Comprehensive Loss: $15,000

     Cr. Impairment Loss: $15,000

 

For available-for-sale debt securities, any unrealized losses previously recorded in accumulated other comprehensive loss should be reclassified into the income statement as a realized loss. In this case, the $15,000 impairment loss is reclassified from accumulated other comprehensive loss to the income statement.

 

Subsequent Recovery

ASC 320 does not allow for the reversal of impairment losses for available-for-sale and held-to-maturity debt securities. Any subsequent recoveries in fair value are recognized in other comprehensive income for available-for-sale securities or remain unrecognized for held-to-maturity securities until the security is sold or matures.

 

Understanding the treatment of debt security impairments under ASC 320 is essential for companies with investments in debt securities. By recognizing and measuring impairment losses in accordance with the accounting standards, companies can accurately report their investment positions and financial performance. Properly accounting for debt security impairments helps maintain transparency and compliance with financial reporting standards, benefiting investors, creditors, and other stakeholders.