Final answer:
OTT impairment for an equity investment occurs when its market value falls below cost and is recognized in net income. It involves writing down the investment to its fair value after evaluating various factors indicating that the loss is not temporary.
Step-by-step explanation:
An OTT impairment for an equity investment is recognized in net income if the fair value of the investment falls below its cost. This impairment reflects a decline in the value of the investment that is deemed to be other-than-temporary. In accounting, specifically under U.S. Generally Accepted Accounting Principles (GAAP), this impairment would require an evaluation of the investment for possible loss in value.
If the decline in fair value is assessed to be other-than-temporary, the investor must write down the investment to its fair value, with the loss being recognized in net income. This process usually involves considering factors such as the duration and extent of the fair value decline, as well as the investor's ability and intent to hold the investment for a period of time sufficient for a forecasted recovery in market value. The write-down establishes a new cost basis for the impaired asset.