FASB Proposes Shortening Amortization Date of Callable Debt Securities

Chris Gaetano
Published Date:
Sep 23, 2016

The Financial Accounting Standards Board (FASB) has released a proposal that, if implemented, would require the premium of callable debt securities to be amortized to the earliest call date, versus the current requirements that they be amortized to maturity. 

A callable security is a financial product that allows the issuer to repurchase or redeem the security by a specified date. Because of this risk, callable securities are generally cheaper than ones without a such a provision, and often include a premium to offset the increased risk. 

Under current GAAP, this type of security is excluded from consideration of early repayment of principle, even if the holder is certain that the issuer will exercise their call. Because of this, unamortized premiums must be recorded as an earnings loss in the event that the issuer makes a call on the purchased security. 

So, the FASB is proposing that the premium for callable debt securities be amortized to the earliest call date, versus the maturity date (similar securities purchased at a discount, versus a premium, would continue to be amortized at maturity). 

"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," said the FASB in the exposure draft. 

The FASB is accepting comments on the proposal until Nov. 28. 

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