FASB plans to change amortization period for redeemable debt securities

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A shorter amortization period for redeemable debt securities purchased at a premium could be considered if an accounting standards update proposal issued by the Financial Accounting Standards Board (FASB) on September 22 is approved.

Under current US GAAP, premiums and discounts on repayable debt securities are generally amortized until the maturity date.

Stakeholders told the FASB that there is diversity in practice in:

  • The amortization period of premiums on repayable debt securities.
  • How the exercise potential of a call is taken into account in current degradation assessments.

“An entity must have a large number of similar loans to take into account estimates of future prepayments of principal when applying the interest method,” the proposal states. “However, an entity that purchases an individual redeemable debt obligation with a premium may not amortize that premium until the first call date. If this repayable debt obligation is called substantially, the entity would record a loss equal to the unamortized premium.

The proposed changes would require an entity to amortize the premium until the first call date.

The proposal would also not require an accounting change for securities purchased at a discount; the discount would continue to be amortized until maturity.

“In most cases, market participants value securities until the call date when the coupon is higher than current market rates (i.e. the security is trading at a premium) and value securities to maturity when the coupon is below market rates (ie the security is trading at a discount) with the expectation that the borrower will act in their best economic interest, ”the proposal states . “Accordingly, the proposed approach would more closely align the interest income recorded on the bonds with a premium or discount with the economics of the underlying instrument.”

So, do you agree that the premiums on the purchased redeemable debt securities are amortized until the first redemption date? Notify the FASB. Comments on the proposal will be accepted until November 28. Instructions on how to submit comments can be found in the Exposure Draft.

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