The Financial Accounting Standards Board issued guidance targeting the treatment of premiums for callable debt securities; however, the treatment of discounts will not be impacted. The changes are described in Accounting Standards Update (ASU) 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 generally amortized over the contractual life of the security, even if the holder is certain that the call will be exercised. This results in the unamortized premium being recorded as a loss when the callable debt security is exercised. This treatment causes the Company to recognize too much interest income prior to the debt security being called, followed by recognition of a loss on the call date.
The new ASU requires Companies to amortize the premium to the earliest call date, which should better recognize interest income according to the underlying instrument. If the debt security is not called at the earliest call date, the Company holding the debt security would be required to “reset” the effective yield on the debt security to the current amortization cost basis and future payment terms of the instrument.
The standard takes effect for fiscal years beginning after December 15, 2018 for public business entities and for fiscal years beginning after December 15, 2019 for all other entities. Early adoption is permitted, including in an interim period. If early-adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.