The FASB on September 22, 2016, issued Proposed Accounting Standards Update (ASU) No. 2016-340, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.
The accounting board wants comments submitted by November 28. The board said it will determine the effective date once it reviews the comments and if it agrees to finalize the amendments and incorporate them into U.S. GAAP.
If finalized, the proposed changes will shorten the amortization period for the premium paid for callable debt securities when they are purchased for more than their market value. The proposal says the amortization period will end on the earliest date on which the debt can be called instead of the instrument’s maturity.
The FASB said it is not proposing changes to debt instruments bought at a discount.
In Proposed ASU No. 2016-340, the FASB said its amendments will more closely align the amortization for the premium to the market’s expectations for the securities. Debt securities with coupons above prevailing interest rates are more likely to be called in by the issuer, who has an economic incentive to roll over the debt with a new class of instruments offering a lower yield to investors.
The FASB said investors in municipal securities are likely to be affected by the changes because tax laws give municipal bond issuers an incentive to sell 30-year bonds with above-market coupons and 10-year call provisions.
“Absent increases in market interest rates, the effect of the tax laws provides the incentive for municipalities to call the bonds at the earliest call date as a result of issuing bonds at a premium,” the FASB said in the proposal.
The proposed amendments to the guidance in ASC 310-20-35-33, Receivables —Nonrefundable Fees and Other Costs Subsequent Measurement — Estimating Principal Prepayments, formerly FASB Q&A 91, and some related guidance for the subsequent measurement of debt and equity securities say the amortization period should end on the earliest call date.
The FASB said it began considering the amendments because it received complaints from some businesses that when the premium’s amortization period matches an instrument’s maturity, the bondholder has to take the unamortized amount and charge it against earnings when the bond is called.
In addition, the accounting for the amortization has not always been consistent, and investors differed in applying their impairment assessments to the premiums.
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