The Financial Accounting Standards Board (FASB) has shortened the amortization period for certain purchased callable debt securities held at a premium, according to a new standard issued on March 30.
Under current US GAAP, when a callable debt security is purchased at a premium, the premium is typically amortized to the maturity date, even if the holder is certain the call will be exercised.
As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings.
But stakeholders told the FASB that this accounting results in the recognition of too much interest income before a borrower calls the debt security, followed by the recognition of a loss on the call date.
The new standard, Accounting Standards Update No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, addresses these concerns by shortening the amortization period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument.
The amendments do not require an accounting change for securities held at a discount. The discount continues to be amortized to maturity.
For public business entities, the standard takes effect for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020.
Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.