Pub. 7 2017-2018 Issue 1

12 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S Relief for Early Calls on Debt BY ANNE COUGHLAN AND TAMMIE LOWRIE, BKD O n March 30, 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, addressing interest income recognition.Under current guidance,whenadebt securityor loan is purchased at a premium, the premium is typically amortized to thematurity date by adjusting the yield, despite the possibility that the borrower may prepay the debt instrument earlier than the contractualmaturitydate. The current interest incomemodel may result in the recognitionof toomuch interest income prior to prepayment anddelayedrecognitionof a loss for theunamortized premium. These amendments require the premium on certain debt securities to be amortized to the earliest call date. Scope The scope is limited to securities that have explicit, non-con- tingent call features that are callable at fixed prices on preset dates. For instruments with contingent call features, once the contingency is resolved and the security is callable at a fixedprice and preset date, the security would then fall within the ASU’s scope. Securities that are immediately pre-payable or where the prepayment date is not preset would be excluded from scope. The exclusion extends to securitized debt instruments with pre- payment features. The ASU applies to all premiums and not just purchasepremiums, e.g., deferredacquisitioncostsor cumulative fairvaluehedgeadjustments that increase theamortizedcostbasis of a callable security above par. Transition Entities should apply these amendments through a cumula- tive-effect adjustment to retained earnings as of the beginning of the first reporting period in the year of adoption. There are no new disclosures required by this ASU; however, in the period of adoption, anentitywouldprovidedisclosuresabout anaccounting principle change. Effective Date This ASU will be effective for public business entities for reporting periods beginning after December 15, 2018. All other entities will have an additional year for adoption. Early adoption is permitted for all entities, including in interim periods. Visit http://www.bkd.com/articles/2017/simplifications-pro- posed-for-debt-equity-features.htmfor relevant examples of this ASU. Contributor Anne Coughlan Director, acoughlan@bkd.com and Tammie Lowrie Partner, tlowrie@bkd.com 