Recoveries of OTTI Losses By: David J. Bayens, CPA Date: 2/18/10 Accounting pronouncements that FASB issued in early 2009 established guidelines for determining losses on other-than-temporarily impaired (OTTI) debt securities that must be run through the income statement.  A number of banks have recorded such losses.  The portion of the unrealized loss that is charged to earnings is the credit loss component.  The amount of the credit loss is based on estimates.  For example, in evaluating private-label mortgage-backed securities, considerations and estimates that factor into the evaluation include bond ratings, geographical considerations and current and future default rates.  Subsequent events are likely to change future estimates- either positively or negatively. What happens when there are recoveries?  FASB has been asked to consider allowing an entity to recover, through earnings, a previously recognized OTTI loss when there is evidence that the impairment loss has reversed.  Under the current rules, once an impaired security has been written down, the fair value becomes its new cost basis.  Subsequent recoveries in the fair value of the security may not be recorded in earnings. The FASB staff’s position is that “requiring write-downs of a security but not allowing recoveries represents a conservative bias.”  Additionally, the inability to recognize recoveries through earnings is inconsistent with international accounting standards.  The staff recommended that any accounting change be coordinated with the International Accounting Standards Board to ensure consistency in accounting standards.  No date has been set to consider such a change.