On 30 March 2017, the US Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortisation period for certain callable debt securities held at a premium to the earliest call date.
Under current US Generally Accepted Accounting Principles (GAAP), entities usually amortise such premia as an adjustment of yield over the contractual life of the instrument. Stakeholders have expressed concerns with the current approach on the basis that current GAAP excludes certain callable debt securities from consideration of early repayment of principal, even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortised premium is recorded as a loss. Furthermore, there is diversity in practice (1) in the amortisation period for premia of callable debt securities, and (2) in how the potential for exercise of a call is factored into current impairment assessments.
Another issue is that the usual practice in the US is to quote, price, and trade callable debt securities assuming a model that incorporates consideration of calls (also referred to as ‘yield-to-worst’ pricing).
The ASU amendments do not require an accounting change for securities held at a discount; the discount continues to be amortised to maturity.
The ASU amendments are effective for public business entities for annual periods beginning after 15 December 2018, including interim periods within those annual periods. For other entities, the amendments are effective for annual periods beginning after 15 December 2019, and interim periods within annual periods beginning after 15 December 2020. Early adoption is permitted.
Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The entity is required to provide disclosures about a change in accounting principle in the period of adoption.
ASU 2017-08 is available on this link.
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