New Guidance for Amortization of Callable Debt Securities Premiums
The Financial Accounting Standard Board recently issued Accounting Standard Update (ASU) 201-08: Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. This ASU introduces a change-- requiring premiums on callable debt securities to be amortized over the period remaining until the earliest call date as opposed to until the maturity date. This was done in response to constituents who argued that the present method, amortizing based on the maturity date, resulted in too much loss being recognized from the unamortized premium when a security was called. This only affects the recognition of premiums; discounts will continue to be recognized as they have been.
The new rule becomes effective for all companies for fiscal years after December 15, 2019; however, early adoption is allowed. An entity should apply the ASU on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. When adopted, the change in accounting principle should be appropriately disclosed in the financial statements.
Please don’t hesitate to contact us with any questions and further guidance on the amortization of callable debt securities premiums.
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