Here is a basic illustration of the model:

As we can see, key aspects of the previous OTTI model under ASC 320 are retained under the ASC 326 model
with targeted amendments made. Some additional differences to note are as follows:

 Under ASC 326, for credit impairment on AFS debt securities that is recognized as an allowance, any
subsequent improvements in credit losses are recognized as a reduction in the allowance and credit
loss expense (in other words, this initial write-down can be reversed!). This represents a key difference
from impairment recognition of AFS debt securities under the current other-than-temporary impairment
(OTTI) model in ASC 320. Under the OTTI model, credit losses were recognized as a reduction to the
cost basis of the investment with recovery of an impairment loss recognized prospectively over time as
interest income (no immediate reversals of impairment allowed!).
 The “other-than-temporary” concept has been eliminated. Use of the length of time a security has been
in an unrealized loss position as a factor in determining whether a credit loss exists or not is no longer
permissible. Therefore, any declines in fair value below cost may be subject to impairment recognition,
even if the decline is a recent trend and expected to be temporary.
 Credit losses are limited to the difference between a security’s amortized cost basis and fair value.
This establishes a floor with regards to the ultimate write-down as a result of impairment, irrespective
of the extent of credit losses identified.

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 Impairment of AFS Debt Securities under ASC 326
 Under ASC 326, AFS debt securities are required to be assessed at the individual debt security level.
A security is impaired when its fair value declines below its amortized cost basis. However, just
because impairment is present, doesn’t necessarily result in recognition of a credit loss.
 The unrealized loss needs further evaluation to determine whether impairment loss recognition is
needed and if so, whether it is recorded as a direct write-down of the AFS debt security’s amortized
cost basis or recorded as an allowance for credit losses.
 An impairment loss is recognized in earnings through a direct write down of the AFS debt security to its
fair value if the entity intends to sell the security or if it is more likely than not that they will be required
to sell the debt security before recovery of the amortized cost basis.
 An impairment is recognized in earnings through an allowance for credit losses, a contra asset
account, for any portion of the unrealized loss that is a result of a credit loss. Any portion of the
unrealized loss that relates to other factors (i.e. other than credit) is recognized in other
comprehensive income.