FASB, Financial Accounting Standards Board.

Accounting for Interest Income Associated with the Purchase of Callable Debt Securities

Last updated on February 10, 2017. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
Due Process Documents
*Decisions Reached at Last Meeting
*Next Steps
*Board/Other Public Meeting Dates
Background Information
Contact Information

Project Objective

The objective of this project is to make targeted improvements on the accounting for the amortization of premiums for purchased callable debt securities.

Due Process Documents

On September 22, 2016, the FASB issued proposed Accounting Standards Update, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The due date for comment letters was November 28, 2016.

• Download the September 22, 2016 proposed Accounting Standards Update, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.
• Use the electronic feedback form to submit comments on the proposed Accounting Standards Update.

*Decisions Reached at Last Meeting (February 1, 2017)

The Board decided that premiums on purchased callable debt securities should be amortized to the earliest call date.

The Board decided to correct the consequential amendment to industry guidance to clarify that that the Board did not intend to broadly change practice for investment companies that hold debt securities.

The Board decided to amend paragraph 310-20-35-33 to clarify that the “callable” instruments in the scope of the amendments should include only instruments that are callable based on an explicit decision by the issuer and should not include those instruments that contain prepayment features, call options that are contingent upon the occurrence of future events, or call options in which the timing or amount to be paid is not fixed.

The Board decided to clarify that all premiums, regardless of how they were generated, should be amortized to the earliest call date.

The Board affirmed that the amendments in the proposed Update should be applied through a cumulative-effect adjustment to the opening retained earnings as of the beginning of the first reporting period in which the final amendments are adopted.

The Board also affirmed the amendments in the proposed Update on transition disclosures.

The Board decided that the effective dates of the final guidance should be as follows:

1. For public business entities—fiscal years and interim periods within those fiscal years, starting after December 15, 2018, with early adoption permitted
2. For entities other than public business entities—fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with early adoption permitted.

*Next Steps

The staff expects to issue a final Accounting Standards Update in the second quarter of 2017.

Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Boards' deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

*February 1, 2017	Board Meeting—Decisions about comment letter responses, transition method, effective date, costs, benefits, complexity, and permission to ballot.
July 27, 2016	Board Meeting—Decisions about the scope of amortization change, disclosures for interest income associated with purchased callable debt securities, and transition method.
September 16, 2015	Board Meeting—Discussions about amending the scope of the project to include the amortization period used for purchased callable debt securities.
March 18, 2015	Board Meeting—Agenda prioritization meeting about whether to add a project to the Board’s agenda

Background Information

When a debt security or loan is purchased at a premium, the premium is typically amortized to the maturity date despite the possibility that the borrower may prepay the debt instrument earlier than the maturity date. The Board has received feedback that this interest income model may result in the recognition of too much interest income before a borrower prepays the debt instrument, and the possibility of a delayed recognition of a loss for the unamortized premium.

At its agenda prioritization meeting on March 18, 2015, the Board voted to add a project to its agenda to require disclosures about interest income on purchased debt securities and loans. The Board subsequently voted to amend the scope of the project to include amortization period considerations.

At the July 27, 2016 meeting, the Board voted to remove interest income disclosures on purchased debt securities and loans from the scope of the project and place the that topic in pre-agenda research. The scope of the project was amended to only include amortization period considerations.

Contact Information

Melissa Maroney
Supervising Project Manager
mamaroney@fasb.org

Emily De Revere
Project Research Associate
ederevere@fasb.org

Dillon Jones
Postgraduate Technical Assistant
djones@fasb.org