# ASC 320-10-55: Investments—Debt Securities — Overall — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

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## ASC 320-10-55: 55 Implementation Guidance and Illustrations

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#### Implementation Guidance

##### [320-10-55-1](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-1)

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This implementation guidance discusses the scope application of this Topic to the following instruments and transactions.

1.  a
    
    Certain debt securities
    
2.  b
    
    [Subparagraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/).
    
3.  c
    
    [Subparagraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/).
    
4.  d
    
    Short sales of debt securities.

##### [320-10-55-2](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-2)

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All of the following debt instruments are within the scope of this Topic if they meet the definition of a [debt security](https://asc.understandingaccounting.org/glossary/d/#debt-security "Any security representing a creditor relationship with an entity. The term debt security also includes all of the following: Preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor A collateralized mortgage obligation (or other instrument) that is issued in equity form but is required to be accounted for as a nonequity instrument regardless of how that instrument is classified (that is, whether equity or debt) in the issuer's statement of financial position U.S. Treasury securities U.S. government agency securities Municipal securities Corporate bonds Convertible debt Commercial paper All securitized debt instruments, such as collateralized mortgage obligations and real estate mortgage investment conduits Interest-only and principal-only strips. The term debt security excludes all of the following: Option contracts Financial futures contracts Forward contracts Lease contracts Receivables that do not meet the definition of security and, so, are not debt securities, for example: Trade accounts receivable arising from sales on credit by industrial or commercial entities Loans receivable arising from consumer, commercial, and real estate lending activities of financial institutions."):

1.  a
    
    Loans restructured as securities. For example, any loan that was restructured involving a modification of terms would be subject to the provisions of this Topic if the debt instrument meets the definition of a [security](https://asc.understandingaccounting.org/glossary/s/#security "A share, participation, or other interest in property or in an entity of the issuer or an obligation of the issuer that has all of the following characteristics: It is either represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer. It is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment. It either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations."). See paragraph [310-20-40-10](https://asc.understandingaccounting.org/asc/310/20/#310-20-40-10) for additional information.
    
2.  b
    
    Beneficial interests in securitized financial assets that are in equity form but that meet the definition of a debt security. For example, some beneficial interests issued in the form of equity represent solely a right to receive a stream of future cash flows to be collected under preset terms and conditions (that is, a creditor relationship), while others, according to the terms of the special-purpose entity, must be redeemed by the issuing entity or must be redeemable at the option of the investor. Consequently, those beneficial interests would be within the scope of both this Topic and Subtopic 325-40 since they are required to be accounted for as debt securities.
    
3.  c
    
    Certificates of deposit (CDs) or guaranteed investment contracts. For example, certain negotiable jumbo CDs and guaranteed investment contracts might meet the definition of security, which was modeled after the definition provided in the Uniform Commercial Code.
    
4.  d
    
    Redeemable convertible preferred stock. For example, convertible preferred stock that has mandatory redemption provisions or is redeemable at the option of the investor is considered a debt security and this Topic would apply.

##### [320-10-55-3](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-3)

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Even if a loan could readily be converted into a security, the loan is not a debt security until it has been securitized. An example of unsecuritized loans is unsecuritized mortgage loans. However, after mortgage loans are converted to mortgage-backed securities, they are subject to the guidance in this Topic.

##### [320-10-55-4](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-4)

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[Paragraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/).

##### [320-10-55-5](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-5)

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[Paragraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/).

##### [320-10-55-6](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-6)

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Sales of securities that the seller does not own at the time of sale are obligations to deliver securities, not investments. Short sale obligations are addressed in the guidance for certain industries (see paragraph [940-320-35-1](https://asc.understandingaccounting.org/asc/320/940/#320-940-35-1) with respect to broker-dealers and paragraph [942-405-25-1](https://asc.understandingaccounting.org/asc/405/942/#405-942-25-1) with respect to depository institutions). For guidance on evaluating whether a short sale transaction involves a derivative instrument, see paragraph [815-10-55-57](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-57).

##### [320-10-55-7](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-7)

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[Paragraph superseded by Accounting Standards Update No. 2016-01](https://asc.understandingaccounting.org/updates/asu-2016-01/).

##### [320-10-55-8](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-8)

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An entity should not look through the form of its investment to the nature of the securities held by an investee to determine whether the scope of this Topic applies.

##### [320-10-55-9](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-9)

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For example, an entity invests in a limited partnership interest (or a venture capital entity) that meets the definition of an equity security. However, substantially all of the partnership's assets consist of investments in debt securities. It is not appropriate to look through the form of an investment to determine whether this Topic applies. In the specific situation described in this paragraph, the investment would be considered an equity security. So, this Topic would not apply to that type of investment. (Topic 321 and Subtopic 323-30 provide guidance on the accounting for limited partnership investments.) Another example of an investment that is considered an equity security is an investment in a mutual fund that invests only in U.S. government debt securities.

##### [320-10-55-10](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-10)

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The following are descriptions of various [structured notes](https://asc.understandingaccounting.org/glossary/s/#structured-note "A debt instrument whose cash flows are linked to the movement in one or more indexes, interest rates, foreign exchange rates, commodities prices, prepayment rates, or other market variables. Structured notes are issued by U.S. government-sponsored enterprises, multilateral development banks, municipalities, and private entities. The notes typically contain embedded (but not separable or detachable) forward components or option components such as caps, calls, and floors. Contractual cash flows for principal, interest, or both can vary in amount and timing throughout the life of the note based on nontraditional indexes or nontraditional uses of traditional interest rates or indexes."), using illustrative terms:

1.  a
    
    Dual-index floater. A bond with a coupon rate that is determined by the spread between two different indexes and that usually includes an above-market interest rate in Year 1. These bonds may have a teaser fixed rate for the first period of the bond's life, after which the interest rate floats according to a predetermined formula.
    
2.  b
    
    Inverse floater. A bond with a coupon rate of interest that varies inversely with changes in specified general interest rate levels or indexes, for example, the London Interbank Offered Rate (LIBOR).
    
3.  c
    
    Levered inverse floater. A bond with a coupon that varies indirectly with changes in general interest rate levels and that applies a multiplier (greater than 1.00) to the specified index in its calculation of interest.
    
4.  d
    
    Delevered floater. A bond with a coupon rate of interest that lags overall movements in specified general interest rate levels or indexes.
    
5.  e
    
    Range floater. A bond in which the investor's coupon is dependent on the number of days that a reference rate stays within a preestablished collar; otherwise, the bond pays either 0% interest or a below-market rate.
    
6.  f
    
    Lower-of and higher-of floaters. A bond that pays an interest rate stated as the lower of or higher of two different formulas.
    
7.  g
    
    Ratchet floater. A bond that pays a floating rate of interest and has an adjustable cap and/or floor that moves in sync with each new reset rate.
    
8.  h
    
    Stepped cap-floor floaters. A bond that pays a floating rate of interest, subject to a scheduled cap, scheduled floor, or both.
    
9.  i
    
    Floating to floating notes. Varying coupon (first-year LIBOR or U.S. Treasury bill based, second-year prime based).
    
10.  j
     
     Floating to fixed notes. Varying coupon (first-year coupon is fixed, second- and third-year coupons are based on LIBOR, U.S. Treasury bills, or prime).
     
11.  k
     
     Indexed amortizing notes. A bond that repays principal based on a predetermined amortization schedule or target value. This value is linked to movements within a specific mortgage-backed security or index. The maturity of the bond changes as the related index changes. This instrument includes a varying maturity.
     
12.  l
     
     Equity indexed notes. Bond return of interest and/or principal is tied to a specified equity index (for example, the Standard & Poor's S&P 500 Index). This instrument may contain fixed or varying coupon rate and may place all or a portion of principal at risk.
     
13.  m
     
     Variable principal redemption bond. A bond whose principal redemption value at maturity is dependent on the change in an underlying index over a predetermined observation period. A typical scenario would be a bond that guarantees a minimum par redemption value of 100%, and the potential for a supplemental principal payment at maturity as compensation for the below-market rate of interest offered with the instrument (providing that the bond satisfies the indexing requirements as outlined in the terms of the offering).
     
14.  n
     
     Yield curve note. Fixed coupon, principal varies as follows: \[(5-year swap rate - 3-month $LIBOR - 1%) × 40 + 100%\] × par (but not less than zero).
     
15.  o
     
     Crude oil knock-in notes. 1% coupon, principal guaranteed with upside potential based on the strength of the oil market.
     
16.  p
     
     Leveraged gold notes. Coupon is zero, variable principal based on the London Gold Index. These notes are designed to incorporate a collar on gold, whereby the investor buys a call and sells a put, in exchange for the coupon.
     
17.  q
     
     Gold-linked bull note. Fixed 3% coupon, principal is guaranteed with upside potential if the price of gold increases.
     
18.  r
     
     Equity-linked bear note. Fixed 4% coupon, principal is guaranteed with upside potential if a specified Standard & Poor's index falls.
     
19.  s
     
     Step-up bonds. Bond provides an introductory above-market yield and the bond then steps up to a new coupon that will be below then-current market rates or, alternatively, the bond may be called.
     
20.  t
     
     Multi step-ups. A security that pays investors an introductory above-market yield—reflecting an embedded call option—for a short lockout period, and then is either called or steps up to a higher coupon rate (which will be below then-current market rates). These bonds can also take the form of step-down or variable step-up structures.
     
21.  u
     
     Credit-sensitive bond. A bond that has a coupon rate of interest that resets based on changes in an entity's credit rating.
     
22.  v
     
     Inflation bond. A bond with a contractual principal amount that is indexed to the inflation rate; the coupon rate is typically below that of traditional bonds of similar maturity.
     
23.  w
     
     Disaster bond. A bond that pays a coupon above that of traditional bonds; however, a substantial portion or all of the principal amount is subject to loss if a specified disaster occurs.
     
24.  x
     
     Specific equity-linked bond. A bond that pays a coupon slightly below that of traditional bonds of similar maturity; however, the principal amount is linked to the stock market performance of an equity investee of the issuer. The issuer may settle the obligation by delivering the underlying shares of the equity investee or may deliver the equivalent [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") in cash.

##### [320-10-55-11](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-11)

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Paragraph [320-10-35-40](https://asc.understandingaccounting.org/asc/320/10/#320-10-35-40) requires the [retrospective interest method](https://asc.understandingaccounting.org/glossary/r/#retrospective-interest-method "A method of interest income recognition under which income for the current period is measured as the difference between the amortized cost at the end of the period and the amortized cost at the beginning of the period, plus any cash received during the period.") to recognize income on certain securities. The amortized cost amount is calculated as the present value of estimated future cash flows using an effective yield, which is the yield that equates all past actual and current estimates of future cash flow streams to the initial investment. If the effective yield is negative, the amortized cost amount should be calculated using a zero percent effective yield. Thus, the following procedures would be required for each reporting period:

1.  a
    
    Calculate the effective yield that equates all past actual cash flows and current estimates of future cash flows to the initial investment amount.
    
2.  b
    
    Using the rate calculated in (a), or zero percent if negative, calculate the present value of the estimated future cash flows. That amount represents the amortized cost at the end of the period.
    
3.  c
    
    Adjust the amortized cost balance to the amount calculated in (b) with the offsetting amount recognized as income for the period.

##### [320-10-55-12](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-12)

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The preadjusted amortized cost balance should represent the amortized cost balance at the beginning of the period less any cash received on the investment during the period.

##### [320-10-55-13](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-13)

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Example 1 (see paragraph [320-10-55-16](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-16)) illustrates application of the retrospective interest method.

##### [320-10-55-14](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-14)

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This paragraph and the following paragraph address whether an investor should account for the two structured note securities together as a unit or account for each security separately. The following indicators should be considered for purposes of identifying whether two securities should be viewed as being purchased for a specified investment strategy. All of these indicators are not required to exist for the securities to be accounted for as a unit. Judgment is required in reaching a determination.

1.  a
    
    The two securities are related in that their fair values will move in opposite directions based on changes in interest rates on a specified date, or after a specified period after issuance. The fair value changes may be caused by a change in the coupon interest rate of the two securities or by altering the maturities of the securities.
    
2.  b
    
    The two securities are issued contemporaneously and in contemplation of one another or are issued separately but the terms for their remaining lives are as described in (a).
    
3.  c
    
    The two securities are issued by the same counterparty and/or the same issuer (or issued by different issuers but structured through an intermediary).
    
4.  d
    
    The two securities were purchased by the investor for the sole purpose of achieving a desired accounting result, and the transactions considered individually would serve no valid business purpose or would not be entered into otherwise.

##### [320-10-55-15](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-15)

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The substance of the investment strategy provided in Example 2 (see paragraph [320-10-55-20](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-20)) is that the investor has simply purchased a single market-based security that results in neither a gain nor a loss when the interest rate resets and, as such, the accounting should not reflect something different. However, other factors, such as a change in credit ratings or a change in market rates, may cause a change in fair value of the unit.

#### Illustrations

##### [320-10-55-16](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-16)

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This Example illustrates the guidance in paragraphs

[320-10-35-38 through 35-43](https://asc.understandingaccounting.org/asc/320/10/#320-10-35-38)

. This Example has the following assumptions:

1.  a
    
    The investor purchases a 3-year, $100 par value structured note at par.
    
2.  b
    
    The principal to be repaid at maturity is based on the performance of the Standard & Poor's S&P 500 Index, which, based on current Standard & Poor's S&P Futures indexes, is expected to provide the investor with principal of $106 at the end of Year 3, and the coupon interest on the note is fixed at 6 percent per year.
    
3.  c
    
    On the acquisition date of the note, the investor expects the following cash flows and income to be recognized over the life of the note.
    
    -   ![](https://asc.understandingaccounting.org/asc-img/GUID-79ECC57A-8BB5-4F1D-B02D-DBFB68790BCE-low.gif)
        
        Period Cash Flows Income Recognized Noncash Income Ending Amortized Cost Acquisition $(100) Year 1 6 $7.85 $1.85 $101.85 Year 2 6 8.00 2.00 103.85 Year 3 112 8.15 2.15 -
        
    
    These cash flows produce an effective yield of 7.85 percent.

##### [320-10-55-17](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-17)

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At the end of Year 1, assume the investor expects to receive only $80 in principal at the end of Year 3, which results in a negative effective yield of 0.71 percent over the life of the note (assume that the investor concludes that a credit loss has not occurred). Accordingly, the amortized cost amount must be reduced to the present value of the estimated future cash flows using a zero percent effective yield, or $92, at the end of Year 1. The income recognized in Year 1 is negative $2 (the amortized cost amount at the end of Year 1 in the table below of $92 less the amortized cost amount at the beginning of the year of $100 plus cash received during the year of $6). The cash flow and income recognition table as of the end of Year 1 is as follows.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-FD04929F-8D61-4B1F-AC05-729488BCEDED-low.gif)
    
    s Cash Flows Income Recognized Noncash Income Negative Yield Adjustment Recognized Ending Amortized Cost Acquisition $(100) Year 1 6 $7.85 $1.85 $(9.85) $92 Year 2 6 - (6) - 86 Year 3 86 - (6) - -

##### [320-10-55-18](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-18)

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These cash flows produce an effective yield of negative 0.71 percent.

##### [320-10-55-19](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-19)

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At the end of Year 2, assume the S&P 500 Index market reverses and the investor now expects to receive the same cash flows that it expected upon acquisition of the note. Using the first table above, the investor would increase the amortized cost amount of the note to $103.85 at the end of Year 2, which would result in recognizing income of $17.85 in Year 2 (amortized cost from the first table at the end of Year 2 of $103.85 less the amortized cost from the second table at the end of Year 1 of $92 plus cash received in Year 2 of $6).

##### [320-10-55-20](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-20)

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This Example illustrates the guidance in paragraphs

[320-10-25-19 through 25-20](https://asc.understandingaccounting.org/asc/320/10/#320-10-25-19)

. An entity purchases two separate structured notes with opposite interest rate characteristics. The terms of the bonds are described below.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-879A6398-55BA-406A-B457-7F3A797E254F-low.gif)
    
    Maturity Initial Coupon Reset Provision Bond A: $1 billion face amount 10 years 8.00% "One month after issuance the interest rate resets to 1% if 10-year Treasury bond rates have decreased by 1 basis point since the issuance of Bond A or 15% if Treasury rates have increased by 1 basis point. After the initial reset, the rate is fixed for the remaining term of the bond." Bond B: $1 billion face amount 10 years 8.00% "One month after issuance the interest rate resets to 1% if 10-year Treasury bond rates have increased by 1 basis point since the issuance of Bond B or 15% if Treasury rates have decreased by 1 basis point. After the initial reset, the rate is fixed for the remaining term of the bond."

##### [320-10-55-21](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-21)

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If accounted for as separate instruments, the entity could classify the bonds as available-for-sale. (Note that these securities would have to be accounted for as a unit rather than as separate instruments.) After the interest rates on the bonds reset, the entity will sell the bond that is in a loss position recognizing a loss in earnings of $475 million (assuming that the current interest rate is 8 percent). The bond that is in a gain position will have a $475 million unrealized gain in other comprehensive income that will be recognized in earnings as a yield adjustment over the remaining 10-year life of the instrument (assuming no further changes in value).

##### [320-10-55-21A](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-21A)

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[Paragraph superseded by Accounting Standards Update No. 2016-13](https://asc.understandingaccounting.org/updates/asu-2016-13/).

##### [320-10-55-22](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-22)

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[Paragraph superseded by Accounting Standards Update No. 2016-13](https://asc.understandingaccounting.org/updates/asu-2016-13/).

##### [320-10-55-23](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-23)

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[Paragraph superseded by Accounting Standards Update No. 2016-13](https://asc.understandingaccounting.org/updates/asu-2016-13/).

##### [320-10-55-24](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-24)

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The following table illustrates the accounting for a transfer from available-for-sale to held-to-maturity.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-7F47481A-0361-4282-B9E4-7371AFD4C882-low.gif)
    
    Amortized Cost "Unrealized Holding Gain in Other Comprehensive Income (Amortization)" "Deferred Tax Adjustment in Other Comprehensive Income @ 30% (a) Credit (Debit)" "Unrealized Holding Gain, Net of Tax, in Other Comprehensive Income Credit (Debit)" "Cumulative Effect on Interest Income Credit (Debit)" Par Premium (Amortization) Total Fair Value 1/1/X1 "Bond purchased, 6 years from maturity, classified as available for sale" 100 6 106 106 19X1 "Amortization of premium, bringing amortized cost to 105" (1) (1) (1) (1) 19X1 Bond appreciates to 120 15 15 (4.5) 10.5 12/31/X1 Balances 100 5 105 120 15 (4.5) 10.5 (1) 1/1/X2 Bond transferred to held-to-maturity at amortized cost basis plus unrealized holding gain 100 20 120 120 15 (4.5) 10.5 19X2 Amortization of premium and equity component (4) (4) (3) 0.9 (2.1) (1) 12/31/X2 Balances 100 16 116 119 12 (3.6) 8.4 (2) 19X3 Amortization of premium and equity component (4) (4) (3) 0.9 (2.1) (1) 12/31/X3 Balances 100 12 112 114 9 (2.7) 6.3 (3) 19X4 Amortization of premium and equity component (4) (4) (3) 0.9 (2.1) (1) 12/31/X4 Balances 100 8 108 107 6 (1.8) 4.2 (4) 19X5 Amortization of premium and equity component (4) (4) (3) 0.9 (2.1) (1) 12/31/X5 Balances 100 4 104 102 3 (0.9) 2.1 (5) 19X6 Amortization of premium and equity component (4) (4) (3) 0.9 (2) (1) 12/31/X6 Maturity at 100 (100) (100) 100 12/31/X6 Balances - - - - - - (6) (a) The offsetting accounting entry would be to record or adjust a deferred tax liability.

##### [320-10-55-25](https://asc.understandingaccounting.org/asc/320/10/#320-10-55-25)

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For illustrative purposes, amortization of the premium and the unrealized holding gain was computed on a straight-line basis. Premiums and discounts on debt securities should be amortized pursuant to Subtopic 310-20. Paragraph [320-10-35-10B](https://asc.understandingaccounting.org/asc/320/10/#320-10-35-10B) requires that the unrealized [holding gain or loss](https://asc.understandingaccounting.org/glossary/h/#holding-gain-or-loss "The net change in fair value of a security. The holding gain or loss does not include dividend or interest income recognized but not yet received, writeoffs, or the allowance for credit losses.") at the date of transfer be amortized in a manner consistent with any premium or discount. The Cumulative Effect on Interest Income column represents the difference between the amortization of the premium and the unrealized holding gain over the life of the security, and does not reflect any coupon interest received.