FASB Discusses Proposed Callable Debt Securities Standard

February 17, 2017

After reviewing feedback from its proposed Accounting Standards Update, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, the Financial Accounting Standards Board (“FASB”) has made tentative decisions on the following:

  • Requests to Require a True “Yield-to-Worst” Amortization Method. Premiums on purchased callable debt securities will be amortized to the earliest call date.
  • Requests to Clarify Consequential Amendments to Paragraph 946-320-35-20. The amendment to industry guidance was corrected to affirm that the FASB did not intend to change practice for investment companies holding debt securities.
  • Requests to Clarify “Callable” and the Interaction with Paragraph 310-20-35-26. Paragraph 310-20-35-33 was amended to clarify “callable” instruments in the amendments. This means instruments are considered callable based on the issuer’s decision and should not include instruments containing prepayment features, call options that are dependent upon future events, or call options wherein the timing or amount to be paid is not fixed.
  • Requests to Clarify Whether All Premiums Should Be Amortized to the Earliest Call Date. The FASB clarified that all premiums must be amortized to the earliest call date.

The amendments in the FASB’s proposal must be applied through a cumulative-effect change to the opening retained earnings as of the start of the first reporting period the final amendments are adopted.

FASB staff members were directed to draft an Accounting Standards Update for vote. If approved, the final guidance will be effective for public entities for fiscal years, and interim periods within, beginning after December 15, 2018. For all other entities, the final guidance will be effective for fiscal years starting after December 15, 2019, and interim periods within those years beginning after December 15, 2020. Early adoption is permitted.

Also covered at the meeting was feedback regarding Chapter 4, “Reporting Performance and Cash Flows,” of the Invitation to Comment, Agenda Consultation, and the chapter’s various subtopics. No decisions were made, but the FASB discussed further research and analysis for its staff to conduct ahead of future board meetings. Going forward, staff members will prepare further analysis on possible path dependencies concerning Chapter 4’s subtopics and the Conceptual Framework project.