Summing It Up: Changes to Rules Related to Callable Debt Securities

callable debt securitiesThe Financial Accounting Standards Board (FASB) recently made targeted changes to the rules governing accounting for amortization of premiums for purchased callable debt securities.  The changes are reflected in Accounting Standards Update (ASU) 2017-08—Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.  This article examines what these changes mean.

A premium debt security is a security that trades above its par value in the secondary market.  Such a security will trade at a premium when it extends a coupon (interest) rate that is higher than the current prevailing interest rates offered for newly issued securities.  This type of investment gives investors a higher yield, and thus they will pay more for it.

Under current Generally Accepted Accounting Principles (GAAP), a premium is typically amortized to the security’s maturity date, even if the holder is certain the call will be exercised.  Therefore, when a call is exercised on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings.  The new standard revised under ASU 2017-08 shortens the amortization period for the premium to the earliest call date. If the call option is not exercised at the earliest call date, then the effective yield of the security should be reset using the payment terms of the debt security.

The amendment does not require an accounting change for securities held at a discount.  Such securities will continue to be amortized to maturity.

Financial statement users noted that prior GAAP resulted in the recognition of excessive interest income before the security was called, which was then followed by the recording of a loss on the call date for the unamortized premium.  They also informed the FASB about diversity in practice regarding the amortization period for premiums of callable debt securities, as well as how the potential for the exercise of a call is factored into current impairment assessments.  In most cases, investors price securities 1) to the call date that produces the worst yield when the coupon is above current market rates, and 2) to maturity when the coupon is below market rates in anticipation that the borrower will act in its economic best interest.  Therefore, in the FASB’s opinion, the amendment to the amortization period will provide more decision-useful information to all financial statement users.

The standard takes effect for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018.  For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 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.  In the period of implementation, an entity should record a cumulative-effect adjustment directly to net assets, or retained earnings, as of the beginning of the period of adoption to account for the change in methodology (also known as the modified retrospective basis).

If you have questions about this new ASU, or would like to request a speaker on this topic for your organization or event, contact one of our PYA executives below, (800) 270-9629.

Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

Doug Arnold

Doug Arnold


Related Posts
PYA was ranked highly for female percentage ownership among the 100 largest accounting firms in the U.S. by Inside Public Accounting. PYA, a national management consulting and accounting firm, has...
Read More

PYA One of the Highest Female Percentage Ownership Among Top 100 U.S. Accounting Firms

The Internal Revenue Service (IRS) recently reported the first revocation of a hospital’s tax-exempt status under the Internal Revenue Code (IRC) Section 501(r) requirements of the Affordable Care Act (ACA)....
Read More

Tax-Exempt Status Revoked: Is Your Hospital’s Tax-Exempt Status Safe?

Public and private companies can expect improvements to hedge accounting, as it is becoming more transparent for financial statement users.  With the issuance of Accounting Standards Update (ASU) No. 2017-12,...
Read More

Hedge Accounting: Simplified Reporting, Other Improvements

With the end of 2017 fast approaching, companies may be looking at paying their employees year-end bonuses.  While these types of supplemental payments are likely welcomed by employees, just how...
Read More
supplementary payments

Planning to Pay a Bonus? Know Which Supplemental Payments Get Taxed

Entities with goodwill from business acquisitions can look forward to some long-requested relief from the cost of performing goodwill impairment testing under a recently released Accounting Standards Update (ASU).  FASB...
Read More
goodwill impairment

Recently Issued ASU Simplifies the Test of Goodwill Impairment

PYA again ranks on INSIDE Public Accounting’s list of Top 100 Accounting Firms.  PYA, a national management consulting and accounting firm, has been ranked as a 2017 Top 100 Firm...
Read More

PYA Among IPA’s Top 100 Largest Accounting Firms

In the past few years, scams capitalizing on new technology and legislation have proliferated. And there seems to be no shortage of tactics used to lure people into these traps. ...
Read More
IRS scams

Knock, Knock: IRS Collection Practices Open Doors for Potential Scams

In response to inquiries from non-profit entities, the American Institute of Certified Public Accountants (AICPA) has provided additional clarity and guidance regarding accounting for unconditional promises to make donations, with...
Read More
temporarily restricted net assets

Attention Non-Profits: AICPA Clarification on Release of Temporarily Restricted Net Assets

More than a year has passed since the Financial Accounting Standards Board (FASB) issued the long-awaited Accounting Standard Update (ASU) for leases: ASU No. 2016-02—Leases (Topic 842). Many organizations are...
Read More
lease standards

New Lease Standard 101: 5 Keys to Successful Adoption of Lease Standards

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop