New rules for accounting for amortization of premiums for purchased callable debt securities

By Ken Tysiac

FASB made targeted changes Thursday to the rules governing accounting for amortization of premiums for purchased callable debt securities.

The changes are described in Accounting Standards Update No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.

Under current GAAP, a premium is typically amortized to the maturity date when a callable debt security is purchased at a premium, 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.

Stakeholders said 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.

To address these concerns, the new standard shortens 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 standard takes effect for public business entities 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 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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