FASB changes premium amortization period for certain callable debt securities

KPMG reports on ASU 2017-08, which shortens the premium amortization period for purchased non-contingently callable debt securities. Shortening the amortization period is generally expected to more closely align the interest income recognition with the expectations incorporated in the market pricing on the underlying securities.

Applicability

ASU 2017-08

• A company that holds certain non-contingently callable debt securities, whose amortized cost basis is at a premium to the amount repayable by the issuer at the earliest call date

Relevant dates

Mandatory effective dates and early adoption provisions:

Key impacts

• The ASU specifies that the premium amortization period ends at the earliest call date, rather than the contractual maturity date, for purchased non-contingently callable debt securities. Shortening the amortization period is generally expected to more closely align the interest income recognition with the expectations incorporated in the market pricing on the underlying securities
• The shorter amortization period means that interest income would generally be lower in the periods before the earliest call date and higher thereafter (if the security is not called) compared to current US GAAP. The premium is amortized to the contractual maturity date under US GAAP
• Because the premium will be amortized to the earliest call date, the holder will not recognize a loss in earnings for the unamortized premium when the call is exercised 
• Investment companies will be required to apply the guidance in the ASU, although they are not required to apply other aspects of the guidance on nonrefundable fees and costs
• The ASU does not change the discount amortization period for purchased debt securities. The discount continues to be amortized to the contractual maturity date

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Report contents

• Applicability
• Key facts and impacts
• Scope
• Premium amortization
• Effective dates and transition