Accountants often struggle when attempting to determine whether an investment is covered by Emerging Issues Task Force (EITF) Issue no. 99-20, because its scope provisions contain a “double negative” that may make interpretation difficult.
In summary, the scope of EITF 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets , includes beneficial interests in securitized financial assets that:
- Are not of high credit quality, and
- Can contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of their recorded investment.
High credit quality securities include securities guaranteed by the U.S. government, its agencies, or other creditworthy guarantors or which are sufficiently collateralized to ensure that the possibility of credit loss is remote. The SEC staff has generally interpreted securities rated AAA or AA to be of “high credit quality.”
The scope of EITF 99-20 includes asset-backed securities (ABS), collateralized debt obligations (CDOs), collateralized mortgage-backed securities (CMBS) and mortgage-backed securities (MBS) that are not of high credit quality. In addition, it includes interest-only strips (I/Os), and principal-only strips (P/Os) that are not guaranteed by a government-sponsored entity (GSE) or a government agency.