United States

FASB Proposal Addresses Premium Amortization on Purchased Callable Debt Securities

Sep 26, 2016
From the Financial Reporting Network

The FASB recently issued a proposed ASU, Premium Amortization on Purchased Callable Debt Securities, which proposes to shorten the amortization period for the premium to the earliest call date. The proposal would not change the accounting for securities purchased at a discount, i.e., the purchaser would continue to amortize the discount to maturity. The proposed amendments would affect all entities that purchase callable debt securities at a premium.

The proposed approach would more closely align (1) the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities because market participants generally price securities to the call date when the coupon is above current market rates (i.e., trading at a premium) and (2) interest income recorded on a bond at a premium or a discount with the economics of the underlying instrument.

An entity would apply the proposal through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Board will determine the effective date and whether to permit earlier application after it considers stakeholder feedback. The comment period ends November 28.