Callable Debt Securities and Amortization: Stay Ahead of the Changes

By Josh Brown

In September, the Financial Accounting Standards Board (FASB) expanded the scope of a current project to include the amortization period in the interest income model for securities that are redeemable with an explicit call option.

Income Recognition Rules Related to Callable Bonds: Changes Coming

According to the board summary, analysts and investors were having difficulty interpreting the interest income in the financial statements. They wanted more information regarding the amount of interest income attributed to cash paid to borrowers versus how much is attributed to the subsequent accounting of the premiums or discounts related to prior purchases.

Under current GAAP, a security or loan purchased at a premium is typically amortized until maturity even if the borrower might pay it off before it matures. Businesses and auditors informed the FASB that this accounting model inflates interest income reported and risks a delay in recognizing a loss for unamortized premium. Banking industry representatives suggested the FASB broaden the scope of the project to cover more transactions, specifically municipal securities, which frequently transact with bonds with 10-year call options at a premium because of tax incentives.

The board decided that all premiums on callable debt securities should amortize to the earliest call date and all discounts on callable debt securities should amortize to the maturity date.

The board’s research staff will evaluate possible disclosure requirements surrounding the income recognition on redeemable securities and loans. The FASB will gather additional information about the instruments that should be part of the project. The FASB will then deliberate on the kinds of instruments that will be covered by the potential change and the disclosure requirements. They did not indicate that all callable debt will be part of the disclosure requirements and no timeline has been set for the proposed changes.

With the vast number of projects undertaken by the FASB and other regulatory bodies, it is often difficult for financial professionals to stay informed on the latest accounting news. However, keeping current on emerging accounting guidance is critical to anyone whose job involves producing, reviewing, monitoring, or analyzing financial data, as it can have significant consequences on how the data is interpreted.

SS&C constantly monitors new and emerging accounting topics to ensure that our accounting solutions meet our clients’ needs and are in accordance with the appropriate standards. SS&C currently offers users a variety of amortization options including amortization to a specific date and a “yield to worst” functionality that can be used to consider the anticipated changes to U.S. GAAP. SS&C continues to review FASB developments and the need to make any system enhancements on a prospective basis.

For more information please contact us at solution@sscinc.com or 1.800.234.0556.

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