The case focuses on the impact of securities sales on debt securities impairment testing. Whether securities sales should influence the determination of the existence of an impairment on other securities is ambiguous. How the structure, timing, and motivations of securities sales impact impairments also requires judgment. Additionally, bank management and external auditors may have different interpretations of the relevant guidance given their differing incentives.

Assume that Generic Bank sells the aforementioned securities shortly after year-end in early 20x3. Does Generic Bank have an impairment loss on the seven securities designated above in 20x2?

Impairment determinations for debt securities (hereafter, “securities” refers to AFS debt securities unless otherwise noted) that have declined in value require two steps. As noted in the case, the bank must first ascertain whether the decline in value of a security is due to credit losses (i.e., a decline in the expectation that bond issuers will make...

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