A shorter amortization period for callable debt securities purchased at a premium could be in the offing if a proposed Accounting Standards Update issued by the Financial Accounting Standards Board (FASB) on Sept. 22 is approved.
Under current US GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date.
Stakeholders have told the FASB that there is diversity in practice in:
The amortization period for premiums of callable debt securities.
How the potential for exercise of a call is factored into current impairment assessments.
“An entity must have a large number of similar loans to consider estimates of future principal prepayments when applying the interest method,” the proposal states. “However, an entity that purchases an individual callable debt security at a premium may not amortize that premium to the earliest call date. If that callable debt security is substantially called, the entity would record a loss equal to the unamortized premium.”
The proposed amendments would require that an entity amortize the premium to the earliest call date.
The proposal would also not require an accounting change for securities purchased at a discount; the discount would continue to be amortized to maturity.
“In most cases, market participants price securities to the call date when the coupon is above current market rates (that is, the security is trading at a premium) and price securities to maturity when the coupon is below market rates (that is, the security is trading at a discount) in anticipation that the borrower will act in its economic best interest,” the proposal states. “As a result, the proposed approach would more closely align interest income recorded on bonds at a premium or a discount with the economics of the underlying instrument.”
So, do you agree that premiums on purchased callable debt securities should be amortized to the earliest call date? Let the FASB know. Comments on the proposal will be accepted until Nov. 28. Instructions on how to submit comments can be found in the exposure draft.