The Financial Accounting Standards Board has settled on a new way for companies to write down the value of certain debt securities.

FASB published Accounting Standards Update No. 2017-08 to change the requirements under GAAP for amortizing certain purchased callable debt securities that are carried at a premium. Currently, companies typically amortize the premium as an adjustment to the yield over the contractual life of an instrument. Now companies will have to adjust to a shorter amortization period.

Users of financial statements raised concerns to FASB over the current amortization methods, first indicating different entities tend to follow different methods, which makes it more difficult for investors or analysts to compare numbers across entities. FASB says it learned entities were following different approaches in terms of the amortization period for premiums of callable debt securities and in how the potential for exercise of a particular call was factored into impairment assessments.

Stakeholders in the accounting also raised concerns that current rules prohibit preparers from taking into account any early repayment of principal even if the holder is certain that the call will be exercised. That means the unamortized premium is recorded at a loss in earnings when a call is exercised on a callable debt security held at a premium.

That prompted FASB to revise current rules to require entities to shorten the amortization period for those securities. The new rule says premiums must be amortized to the earliest call date. The new rule does not affect securities held at a discount, which will continue to be amortized to maturity. The changes are expected to have their greatest impact on certain financial institutions, such as retail and commercial banks, as well as insurance companies. 

According to FASB, the new approach more closely aligns the amortization period of premiums and discounts to expectations that are naturally incorporated into market pricing of the underlying securities, thus the standard is more closely aligned with economic realities. For public companies, the new requirements takes effect for fiscal years beginning after Dec. 15, 2018, with early adoption permitted.