FASB Proposes New Rules for Amortization of Debt Securities

The Financial Accounting Standards Board has proposed to amend the amortization period for callable debt securities that are purchased at a premium.

FASB released a proposed accounting standards update last week to change the rules for premium amortization of purchased callable debt securities. In the proposed update, the board is proposing to reduce the amortization period for the premium to the earliest call date.

Under current U.S. GAAP, companies can amortize the premium as an adjustment of yield over the contractual life of the instrument. However, some of FASB’s stakeholders are concerned that current GAAP excludes callable debt securities from consideration of early repayment of principal, even if the holder is sure the call will be exercised.

“As a result, upon the exercise of a call on a callable debt security purchased at a premium, the unamortized premium is recorded as a loss in earnings,” said the document.

In addition, FASB has heard about some diversity in practice among firms in both the amortization period for premiums of callable debt securities and in how the potential for exercise of a call is factored into current impairment assessments. Generally, in the U.S., callable debt securities are quoted, priced and traded assuming a model that incorporates consideration of calls, known as “yield-to-worst” pricing.

Changing the amortization period could provide more useful information by aligning the amortization period of premiums and discounts to the expectations that are incorporated in the market pricing on the underlying securities.

FASB is asking for comments on the proposal by Nov. 28, 2016.