FASB Proposes Shorter Period for Callable Bonds

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By Denise Lugo

Sept. 23 — The Financial Accounting Standards Board is proposing to shorten the period for which callable debt securities can be spread out in financial statements.

The period for callable debt securities—the ones purchased at a premium—would be shortened to the earliest date the bond is redeemed, FASB said Sept. 22. For securities purchased at a discount, however, there wouldn't be a change. The discount would continue to be amortized to the maturity date.

The proposed revisions—largely affecting banks and insurers, among others—would align the amortization period of premiums and discounts to market price expectations on the underlying securities, FASB said.

Furthermore, the change would remove differences in how companies currently account for such transactions, as well as provide more data to investors and others, FASB said.

Callable Bonds Trending Up

Callable debt securities—bonds that can be redeemed prior to maturity—are typically issued by corporate and municipal entities. More than $1 trillion of these bonds were traded in 2015, according to the Securities Industry and Financial Markets Association.

In most cases, market participants price securities to the call date when the security is trading at a premium, and price them to maturity when they’re trading at a discount, FASB said. This is done in anticipation that the borrower will act in its economic best interest.

Board Member Dissents

One FASB board member, Marc Siegel, dissented on the proposal. Among other reasons, Siegel said it fails to provide additional disclosures about interest income on purchased debt securities and loans.

FASB said it’s seeking comments by Nov. 28 on the proposed accounting standards update, Receivables--Nonrefundalbe Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.

To contact the reporter on this story: Denise Lugo at dlugo@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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