INVESTMENT SECURITIES
1A. Investments in Debt and Equity Securities
Bank Accounting Advisory Series
2
August 2018
The gain or loss attributable to changes in foreign currency exchange rates, however, would be
recognized in income, if the investment is categorized as HTM. Banks should follow the
accounting guidance provided in ASC 830 for such investments.
Question 2
What is the appropriate accounting for transfers between investment categories?
Staff Response
In accordance with ASC 320-10-35, transfers between investment categories are accounted for as
follows:
• HTM to AFS: The unrealized holding gain or loss at the date of the transfer shall be
recognized in AOCI, net of applicable taxes.
• AFS to HTM: The unrealized holding gain or loss at the date of transfer shall continue to be
reported in AOCI but shall be amortized over the remaining life of the security as a yield
adjustment. This amortization of the unrealized holding gain or loss will offset the effect on
income of amortization of the related premium or discount (see question 4).
• All transfers to the trading category: The unrealized gain or loss at the date of transfer, net
of applicable taxes, shall be recognized in earnings immediately.
• All transfers from the trading category: The unrealized gain or loss at the date of transfer
will have already been recognized in earnings and shall not be reversed.
Transfers in and out of the trading category and from HTM to AFS should be rare.
Facts
A bank purchased a $100 million bond on December 31, 20X1, at par. The bond matures
on December 31, 20X6. Initially, the bond was classified as AFS. On December 31, 20X2, the
bank decides it intends to hold the bond until maturity and transfers the security to the HTM
portfolio. The fair value of the security on the date of transfer is $92 million. The bank has
appropriately determined that the decline in the security’s fair value is not OTTI.
Question 3
How should the bank account for the transfer?
Staff Response
In accordance with ASC 320-10-35-10, at the date of transfer, the bank should transfer the
security at its fair value, $92 million, which becomes the security’s amortized cost. The
$8 million unrealized holding loss on the date of transfer is not recognized in net income but
remains in AOCI. In addition, an unaccreted discount of $8 million offsets the security’s face
amount of $100 million, so the security is reported at its fair value ($92 million) when
transferred.
INVESTMENT SECURITIES
1A. Investments in Debt and Equity Securities
Bank Accounting Advisory Series
3
August 2018
Under ASC 320-10-35-16, the $8 million discount is accreted to interest income over the
remaining life of the security. In accordance with ASC 320-10-35-10d, the unrealized loss
amount in AOCI is amortized simultaneously against interest income. Those entries offset or
mitigate each other.
For regulatory capital purposes, the unamortized AOCI related to the security is treated in the
same manner as a net unrealized gain or loss on an AFS debt security.
Question 4
Do any restrictions exist on the types of debt securities that may be placed in the HTM category?
Staff Response
Generally, there are few restrictions on how bank management chooses to allocate the securities
in its portfolio among the investment categories. ASC 320 requires that a security, such as an IO
strip, not be accounted for as HTM, if it can be contractually prepaid or otherwise settled, so that
its holder would not recover substantially all of its recorded investment.
Additionally, an institution may not include a convertible debt security as HTM. Convertible
debt bears a lower interest rate than an equivalent security without such a feature, because it
provides the owner with potential benefits from stock price appreciation. Use of this feature,
however, requires the owner to dispose of the debt security before maturity. Accordingly, the
acquisition of such a security implies that the owner does not intend to hold it to maturity.
No restrictions prevent a bank from pledging HTM securities as collateral for a loan. A bank
may also pledge HTM securities in a repurchase agreement if the agreement is not effectively a
sale in accordance with ASC 860.
Question 5
How should banks account for investments in mutual funds under ASC 320?
Staff Response
Investments in mutual funds cannot be classified as HTM because mutual funds are an equity
investment, for which there is no maturity. Therefore, at acquisition, the bank must evaluate
whether the investment should be classified as trading or AFS. A mutual fund bought principally
for sale in the near term should be classified as a trading investment. For a mutual fund that is
not bought principally for sale in the near term, a bank may elect to classify the fund as trading
or AFS at the time of purchase. Net unrealized holding gains and losses on trading investments
are included in income, while net unrealized holding gains and losses on AFS investments are
included in AOCI until they are realized.
INVESTMENT SECURITIES
1A. Investments in Debt and Equity Securities
Bank Accounting Advisory Series
4
August 2018
PBEs and non-PBEs
Under ASU 2016-01, mutual funds will no longer be classified as either trading or available-
for-sale; instead, they will generally be measured at fair value with changes in fair value
recognized through net income.
Question 6
How should gains and losses be reported when mutual fund investments are sold?
Staff Response
Realized gains and losses should be included in determining net income for the period in which
they occur. Realized gains and losses should be recorded in the call report as “Realized gains
(losses) on available-for-sale securities” if the mutual fund investments were classified as AFS,
or as “Trading revenue” if the mutual fund investments were classified as trading. If mutual fund
investments classified as AFS are sold, the component in AOCI should be adjusted to remove
any previously included amounts applicable to them.
PBEs and non-PBEs
Under ASU 2016-01, mutual funds will generally be measured at fair value, with changes in
fair value recognized through net income. All changes in a mutual fund’s fair value should be
reported in earnings at each reporting date. Therefore, the sale of a mutual fund would
generally not give rise to a gain or loss except to the extent a bank has not yet recorded the
mutual fund’s change in fair value to the point of sale.
Question 7
When may a bank sell HTM securities and not “taint” the portfolio?
Staff Response
ASC 320 establishes the following “safe harbors” under which HTM securities may be sold
without tainting the entire portfolio:
• Evidence of a significant deterioration in the issuer’s creditworthiness.
• A change in the tax law that eliminates or reduces the tax-exempt status of interest on the
debt security (but not a change in tax rates).
• A major business combination or disposition that necessitates the sale of the securities to
maintain the bank’s existing interest rate risk position or credit risk policy.
• A change in statutory or regulatory requirements that significantly modifies either the
definition or level of permissible investments that may be held.
• A significant increase in industry-wide regulatory capital requirements that causes the bank
to downsize.
• A significant increase in the risk weights of debt securities for risk-based capital purposes.
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