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FASB Issues ASU 2017-08, Requires Amortization of Premiums to Call Date

Overview
The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) 2017-08, Receivables – Non-refundable Fees and Other Costs (Subtopic 310-20), which shortens the period of amortization of the premium on certain callable debt securities to the earliest call date.

Currently, generally accepted accounting principles (“GAAP”) excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings.  

Users of financial statements have indicated that this ASU will provide more decision-useful information because it better aligns the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities.

Key Provisions
This ASU requires that premiums on certain callable debt securities be amortized to the shortest call date.  Securities within the scope of this paragraph are those that have explicit, noncontingent call features that are callable at fixed prices and on preset dates. Securities purchased at a discount and mortgage-backed securities in which early repayment is based on prepayment of the underlying assets of the security are outside the scope of the ASU. 

If the security is not called, an entity should reset the effective yield based on the payment terms of the security.  

Effective Dates and Transition
For public business entities, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Early adoption is permitted, including adoption in an interim period. If  an  entity  early  adopts  the  amendments in  an  interim  period,  any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

An entity should apply the amendments from this ASU on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.   The premium on all investments within the scope of the ASU will need to be recalculated from date of purchase as if the premium was being amortized to the call date. The difference between this recalculated amount and the current remaining premium as of the beginning of the period of adoption is recorded as the cumulative effect decrease to retained earnings. 

Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. These disclosures include:

  • The nature of and reason for the change
  • The method of applying the change, including the effect of the change on income from continuing operations, net income or any other affected financial statement line items and any affected per-share amounts for the current period
  • The cumulative effect of the change on retained earnings as of the beginning of the period of adoption

Contact
If you have any questions, please contact your Wolf & Company representative or Dan Morrill, CPA, Member of the Firm, at 413-726-6857 or dmorrill@wolfandco.com