INVESTMENT SECURITIES
1A. Investments in Debt and Equity Securities
Bank Accounting Advisory Series
8
August 2018
Question 13
Does the decline in value in the trust preferred securities raise any other issues?
Staff Response
The issue of whether the impairment in the trust preferred securities should be considered OTTI
must be addressed. See Topic 1B for further discussion of OTTI.
Facts
A bank affected by major-category hurricanes (category 4 storms such as Hurricanes
Katrina and Rita) sells investment securities that were classified as HTM to meet its liquidity
needs.
Question 14
Will the bank’s intent to hold other investment securities to maturity be questioned?
Staff Response
Under normal circumstances, the sale of any HTM investment would call into question a bank’s
intent to hold its remaining HTM investments to maturity. ASC 320-10-25 indicates that events
that are isolated, nonrecurring, and unusual for the reporting enterprise that could not be
reasonably anticipated, however, may cause an enterprise to sell or transfer an HTM security
without necessarily calling into question its intent to hold other HTM debt securities to maturity.
ASC 320-10-25 specifically states that extremely remote disaster scenarios should not be
anticipated by an entity in deciding whether it has the positive intent and ability to hold a debt
security to maturity. Accordingly, in this situation the sale of any HTM investment security
would not necessarily call into question the bank’s intent to hold its remaining HTM investment
securities until maturity.
Question 15
Should a bank account for its FHLB (or FRB) stock as an equity investment?
Staff Response
No. Although FHLB (or FRB) stock is an equity interest in a FHLB (or FRB), the stock does not
have a readily determinable fair value because its ownership is restricted and there is no actively
traded market. FHLB (or FRB) stock can only be sold to the FHLB (or FRB) or to another
member institution at its par value. In addition, the equity ownership rights represented by FHLB
(or FRB) stock are more limited than those for a public company due to regulatory oversight and
approval in the budgeting process and payout of dividends.
INVESTMENT SECURITIES
1A. Investments in Debt and Equity Securities
Bank Accounting Advisory Series
9
August 2018
Question 16
How should a bank account for investments in FHLB and FRB stock?
Staff Response
Investments in FHLB and FRB stock should be accounted for in accordance with ASC 942-325-
35. FHLB and FRB stock should be carried at cost and evaluated for impairment based on the
bank’s expectation of the ultimate recoverability of the stock’s par value. Dividend income on
FHLB stock should be reported as other interest income in the call report when the dividend is
declared. Banks may accrue dividends on FRB stock when and if they are entitled to receive
them in accordance with Regulation I, 12 CFR 209.4(e). Dividend income on FRB stock should
be reported as other interest income in the call report as it is earned and accrued.
Facts
A bank owns common stock in a company that provides IT services to banks. The
recorded investment in the common stock is $145,000, and it is accounted for under the cost
method. Recently, the bank purchased an additional $100,000 in common stock, which increased
the bank’s ownership interest from 13 percent to 22 percent. The bank has concluded that its
ownership now allows it to exert significant influence over the investee as defined in
ASC 323-10. Due to the increase in ownership, the bank is now required to change its accounting
for this equity investment from the cost method to the equity method.
Question 17
Is the bank required to apply the equity method retroactively to the date of the original
investment?
Staff Response
No. In accordance with ASC 323-10-35-33, on the date the bank obtains the ability to exert
significant influence over an investee, the bank is required to change to the equity method of
accounting. The change is made prospectively, and the previous cost basis of the asset is
increased by the amount of the additional investment purchased. The bank would increase the
cost basis from $145,000 to $245,000 and apply the equity method of accounting in subsequent
periods.
Question 18
How should a bank account for premiums and discounts on securities?
Staff Response
Premiums and discounts generally should be accounted for as adjustments to the yield of the
security. ASC 310-20-35-18 generally requires institutions to follow the interest method when
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INVESTMENT SECURITIES
1A. Investments in Debt and Equity Securities
Bank Accounting Advisory Series
10
August 2018
amortizing a premium or accreting a discount on a security. A premium must be amortized, and a
discount must be accreted, from the date of purchase to the maturity date, not an earlier call date,
unless the security meets the exception described in question 20.
Question 19
What are the exceptions to the use of the maturity date when amortizing premiums or discounts
on securities?
Staff Response
ASC 310-20-35-26 permits estimated prepayments to be used only for holdings of similar debt
securities for which prepayments are probable and the timing and amount of the prepayments can
be reasonably estimated. In practice, MBSs and CMOs generally meet those conditions. For
MBSs, CMOs, and other mortgage-related securities that meet the conditions of ASC 310-20-35-
26, banks may consider estimates of prepayments in determining the appropriate amortization
period for the premium or discount.
PBEs and early adopters only
There are two exceptions.
1. ASC 310-20-35-26 permits estimated prepayments to be used only for holdings of similar
debt securities for which prepayments are probable and the timing and amount of the
prepayments can be reasonably estimated. In practice, MBSs and CMOs generally meet
those conditions. For MBSs, CMOs, and other mortgage-related securities that meet the
conditions of ASC 310-20-35-26, banks may consider estimates of prepayments in
determining the appropriate amortization period for the premium or discount.
2. Premiums on debt securities that are callable at fixed prices and on preset dates should be
amortized to the earliest call date, unless the first exception is applied (ASC 310-20-35-
33). The premium to be amortized to the earliest call date is the amount by which the
amortized cost exceeds the amount repayable at the earliest call date. To illustrate, assume
a bank purchases a $100 par bond for $105. The bond can be called on a preset date at
$102. Under this exception, the bank would amortize $3 from the purchase date to the
earliest call date, as that is the difference between the $105 purchase price and the $102
call price.
Facts
A bank purchased a CMO tranche, classified as HTM, that has moderate prepayment risk.
The acquisition price includes a premium over par. Prepayment estimates have been considered
in establishing the constant yield rate under ASC 310-20-35-26.
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