This Subtopic addresses an investment company's accounting for investments in debt and equity securities,
including matters encountered by investment companies holding high-yield debt securities in their portfolios. Included is discussion of all of the following matters:
- a
Interest income from step bonds and payment-in-kind bonds
- b
Previously recorded purchased interest if recoverability becomes doubtful in connection with defaults or potential defaults by issuers
- c
Additional expenditures made by investment companies in support of high-yield debt securities and other securities.
High-yield debt securities may be issued or traded at significant discounts from their face amounts (principal).
Interest for some high-yield debt securities is not paid currently. Instead, interest may be deferred and paid at maturity (zero-coupon bonds) or in periodic interest payments that do not commence until a specific date in the securities' life cycle (step bonds), or interest may be paid in the form of additional debt securities of the issuer bearing similar terms (payment-in-kind bonds).
If market prices fluctuate significantly or issues of debt securities have defaulted, a judgment about whether to write off interest receivable will involve both components. Writeoffs of interest receivable differ from traditional writeoffs of trade accounts receivable since they can significantly affect an investment company's statement of operations, the performance measurement ratios of expenses to average net assets, and net investment income to average net assets.
The market for many high-yield debt securities is relatively thin. When issuers of high-yield and other debt securities default, the bondholders often become active in any negotiations and in the workout process. This process often results in new terms that restructure the obligations to allow the issuer to continue to meet its ongoing interest obligations and maintain some, if not all, of the principal value to the holders of the obligations.