Credit losses on available-for-sale securities

Banks and insurers hold large portfolios of available-for-sale debt securities, and the rate rises of recent years left many of them below cost. ASC 326-30 separates credit losses from rate-driven declines. This guide explains the test, the fair value floor, the effect of an intent to sell, and works through an example.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

Available-for-sale debt securities follow a separate credit loss model in ASC 326-30, not CECL. An impairment exists only when fair value is below amortized cost. If the company intends to sell, or is more likely than not required to sell, it writes the security down to fair value through earnings. Otherwise, it recognizes an allowance for the credit-related part of the decline, measured by comparing the present value of expected cash flows with amortized cost, limited to the amount by which fair value is below amortized cost. The rest of the decline goes to other comprehensive income.

At a glance

Model
ASC 326-30, not CECL
Trigger
Fair value below amortized cost
Intent to sell
Write down to fair value in earnings
Credit loss
Amortized cost less PV of expected cash flows
Limit
The fair value shortfall
Excel
CECL calculator
Credit losses on available-for-sale securitiesModel: ASC 326-30, not CECL; Trigger: Fair value below amortized cost; Intent to sell: Write down to fair value in earnings; Credit loss: Amortized cost less PV of expected cash flows; Limit: The fair value shortfall; Excel: CECL calculator.KEY FACTS AT A GLANCECredit losses on available-for-sale securitiesModelASC 326-30, not CECLTriggerFair value belowamortized costIntent to sellWrite down to fair valuein earningsCredit lossAmortized cost less PV ofexpected cash flowsLimitThe fair value shortfallExcelCECL calculatorTax BakersCredit losses on available-for-sale securitiesModel: ASC 326-30, not CECL; Trigger: Fair value below amortized cost; Intent to sell: Write down to fair value in earnings; Credit loss: Amortized cost less PV of expected cash flows; Limit: The fair value shortfall; Excel: CECL calculator.KEY FACTS AT A GLANCECredit losses onavailable-for-sale securitiesModelASC 326-30, not CECLTriggerFair value below amortized costIntent to sellWrite down to fair value in earningsCredit lossAmortized cost less PV of expected cashflowsLimitThe fair value shortfallExcelCECL calculatorTax Bakers
Key facts at a glance, as set out in this guide.

How are credit losses on available-for-sale debt securities assessed?

Credit losses on an AFS debt securityCredit losses on an AFS debt securityIs fair value belowamortized cost?NoNo impairmentYesDoes the company intend, orneed, to sell before recovery?YesWrite down to fairvalue in earningsNoIs PV of expected cash flowsbelow amortized cost?NoDecline in OCI onlyYesAllowance for the credit loss, capped at the fall in value
Only the credit-related part reaches earnings, unless the security will be sold.

An example

ItemAmount
Amortized cost$1,000,000
Fair value$920,000
Unrealized loss$80,000
Present value of expected cash flows, at the effective interest rate$950,000
Credit loss: $1,000,000 - $950,000$50,000
Allowance for credit losses, limited to $80,000$50,000, through earnings
Non-credit loss$30,000, in other comprehensive income

If the company intended to sell the security, there would be no split: the full $80,000 would be written off through earnings and the amortized cost reset to $920,000. The AFS security sheet of the CECL calculator (Excel) runs both cases.

The allowance is shown as a deduction in the amortized cost disclosure, while the security itself is still carried on the balance sheet at fair value, so readers see both the credit loss and the total decline.

What is the fair value floor?

The allowance can never exceed the amount by which fair value is below amortized cost. If the credit loss calculated from cash flows were $100,000 but fair value were only $80,000 below amortized cost, the allowance would be limited to $80,000. This prevents the carrying amount, fair value, from being reduced below the price the security could be sold for.

What suggests a credit loss rather than a rate-driven decline?

  • A rating downgrade of the issuer or the security.
  • Adverse conditions specific to the issuer, its industry or region.
  • Failure to make scheduled interest or principal payments.
  • The extent to which fair value is below amortized cost, considered together with the factors above.

A decline caused purely by higher market interest rates, for a highly rated issuer, usually involves no credit loss: expected cash flows have not changed at all.

Can the allowance be reversed?

Yes. Unlike the old other-than-temporary impairment model, which reduced the cost basis permanently, the allowance is remeasured each period and released through earnings if expected cash flows improve or fair value recovers, though never below zero.

An example of a reversal

A year later, the issuer's prospects improve: fair value recovers to $980,000 and the present value of expected cash flows to $990,000. The credit loss is now $10,000, within the $20,000 fall in value, so the allowance falls from $50,000 to $10,000 and $40,000 is released to earnings.

How is accrued interest treated?

Companies may present accrued interest receivable separately and exclude it from amortized cost for the impairment test, provided they write off uncollectible accrued interest on time, usually by reversing interest income. The present value of expected cash flows is calculated at the security's effective interest rate.

How does IFRS 9 compare?

Under IFRS 9, debt instruments at fair value through OCI carry 12-month or lifetime ECL from day one, recognized in profit or loss with the offset in OCI, regardless of whether fair value is below cost. See IFRS 9 classification, IFRS 9 vs US GAAP classification and CECL explained.

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Questions people ask

Does CECL apply to available-for-sale debt securities?

No. They follow ASC 326-30, which recognizes an allowance only when fair value is below amortized cost.

How is a credit loss on an AFS security measured?

As amortized cost less the present value of expected cash flows, limited to the amount by which fair value is below amortized cost.

What happens if a company intends to sell an AFS security in an unrealized loss position?

It writes the security down to fair value through earnings.

Can credit loss allowances on AFS securities be reversed?

Yes. The allowance is remeasured each period and can be released through earnings.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. FASB Accounting Standards Codification: Topic 326, Financial Instruments: Credit Losses
  2. Financial Accounting Standards Board

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ASC 326CECL explained: current expected credit lossesIFRS vs US GAAPIFRS 9 vs US GAAP: classification of financial assetsECLCECL disclosures

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This guide is general information. It is not tax or legal advice for your situation.