Case Scenario: Find a proposed standard from the current or prior year that is related to this course (asset-type transactions only) in the FASB Codification system. Prepare a 2-3 page summary of the FASB proposal highlighting what changed, why, and the potential impact on the financial statements and disclosures. Accounting Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)? The Board is issuing this proposed Update to amend the amortization period for callable debt securities purchased at a premium. The Board is proposing to shorten the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles (GAAP), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. Stakeholders have raised concerns that current GAAP excludes 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 purchased at a premium, the unamortized premium is recorded as a loss in earnings. Additionally, stakeholders have told the Board that there is diversity in practice
(1) in the amortization period for premiums of callable debt securities and
(2) in how the potential for exercise of a call is factored into current impairment assessments.
Stakeholders have noted that generally, in the United States, callable debt securities are quoted, priced, and traded assuming a model that incorporates consideration of calls (also referred to as “yield-to-worst†pricing). The Board also heard from financial statement users that the amendment to the amortization period in this proposed Update would provide more decision-useful information because it would align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. How Would the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Would They Be an Improvement? Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. An entity must have a large number of similar loans to consider estimates of future principal prepayments when applying the interest method.
However, an entity that purchases an individual callable debt security at a premium may not amortize that premium to the earliest call date. If that callable debt security is subsequently called, the entity would record a loss equal to the unamortized premium. The amendments in this proposed Update would require that an entity amortize the premium to the earliest call date. The proposed amendments would not require an accounting change associated with callable debt securities purchased at a discount; an entity would continue to amortize to the maturity date the discount associated with the purchase of a callable debt security. This approach would more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In most cases, market participants price securities to the call date when the coupon is above current market rates (that is, the security is trading at a premium) and price securities to maturity when the coupon is below market rates (that is, the security is trading at a discount) in anticipation that the borrower will act in its economic best interest. As a result, the proposed approach would more closely align interest income recorded on bonds at a premium or a discount with the economics of the underlying instrument.