# ASC 320-946-05: Investments—Debt Securities — Financial Services—Investment Companies — 05 Overview and Background Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/320/946/#05-overview-and-background) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:9781f318e71fad230065a66dce9cb0b3a1325611b6e0e2f746f1b1166151601a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 320-946-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/320/946/#05-overview-and-background) SEC content: no ##### [320-946-05-1](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-1) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:37c7f7a2a07ddf55977ced7b3561b2e2399d51ae8da9f937f6600e64d52319a3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/h/#high-yield-debt-securities "Corporate and municipal debt securities having a lower-than-investment-grade credit rating (BB+ or lower by Standard & Poor's, or Ba or lower by Moody's). Because high-yield debt securities typically are used when lower-cost capital is not available, they have interest rates several percentage points higher than investment-grade debt and often have shorter maturities. These high-yielding corporate and municipal debt obligations are frequently referred to as junk bonds.") in their portfolios. Included is discussion of all of the following matters: 1. a Interest income from step bonds and payment-in-kind bonds 2. b Previously recorded purchased interest if recoverability becomes doubtful in connection with defaults or potential defaults by issuers 3. c Additional expenditures made by investment companies in support of high-yield debt securities and other securities. ##### [320-946-05-2](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-2) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:c316981924a08445517cf8187f9a5db04943875b895f188da4f9c7a0fda3960d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An investment company's securities portfolio typically comprises substantially all its net assets. Portfolio securities produce income from dividends, interest, and changes in [fair values](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.") of securities while they are owned by the fund. #### High-Yield Debt Securities ##### [320-946-05-3](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-3) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:df80c0a1e02482332c5a8c6f1945e16228df82c74bc2f2397d3580d83c73a3b0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. High-yield debt securities ([junk bonds](https://asc.understandingaccounting.org/glossary/j/#junk-bonds "See High-Yield Debt Securities.")) take various forms. The most common forms may include zero-coupon bonds, [payment-in-kind bonds](https://asc.understandingaccounting.org/glossary/p/#payment-in-kind-bonds "Bonds in which the issuer has the option at each interest payment date of making interest payments in cash or in additional debt securities. Those additional debt securities are referred to as baby or bunny bonds. Baby bonds generally have the same terms, including maturity dates and interest rates, as the original bonds (parent payment-in-kind bonds). Interest on baby bonds may also be paid in cash or in additional like-kind debt securities at the option of the issuer."), and deep-discount [step bonds](https://asc.understandingaccounting.org/glossary/s/#step-bonds "Bonds that involve a combination of deferred-interest payment dates and increasing interest payment amounts over the bond lives and, thus, bear some similarity to zero-coupon bonds and to traditional debentures."). High-yield debt securities have supplied significant capital for business expansion and corporate restructuring. These securities are inherently different from investment-grade debt securities. They present additional credit, liquidity, and market risks for all participants in this marketplace: holders, issuers, underwriters, and broker-dealers. ##### [320-946-05-4](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-4) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:c504198a00e26fa42ae33fb35561424f735eadca252f364f147ace623a241ed0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. High-yield debt securities typically are unsecured and subordinate to other debt outstanding. Many issuers of high-yield debt securities are highly leveraged, with limited equity capital. That, plus a market for such securities that may not always be liquid, may increase the market risk, liquidity risk, and credit risk of high-yield debt securities as follows: 1. a Market risk. In contrast to investment-grade bonds (the market prices of which change primarily as a reaction to changes in interest rates), the market prices of high-yield bonds (which are also affected by changes in interest rates) are influenced much more by credit factors and financial results of the issuer and by general economic factors that influence the financial markets as a whole. Such factors often make it difficult to substantiate the market valuation of high-yield bonds. 2. b Liquidity risk. The market risk is often heightened by liquidity risk; that is, the absence of centralized high-yield bond exchanges and relatively thin trading markets, which make it more difficult to liquidate holdings quickly and increase the volatility of the market price. There is generally no centralized or regulated procedure for pricing high-yield debt issues. 3. c Credit risk. Issues of high-yield debt securities are more likely to default on interest or principal than are issues of investment-grade securities. ##### [320-946-05-5](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-5) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:1af394c1928e071eb1deb55754aa76f0e0221f11a966b95bb8375f7e62474ee7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. High-yield debt securities may be issued or traded at significant discounts from their face amounts (principal). ##### [320-946-05-6](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-6) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:e95fa3069a76c4b8e9f83bd87ea0cb47a401e10b74f290f6f5932a10ebb0ad69 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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). #### Interest Receivable Purchased on Defaulted Debt Securities ##### [320-946-05-7](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-7) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:616efdd75142f57fe1f3e9ca606d7cb45ceaf0b33981f3866dad23d6fcf93c25 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Interest receivable from debt securities generally comprises both of the following distinct components: 1. a Interest purchased from the previous bondholder 2. b Interest accrued by the investment company during the holding period. ##### [320-946-05-8](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-8) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:6aca7527f672643ee6d49ec1eb21175b6a77c66561d26b220b965f1b89c6a9c3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. #### Expenditures in Support of Defaulted Debt Securities ##### [320-946-05-9](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-9) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:64e3bcf305b25a59f9f633a896c492c57691256011f10c6b8b034bee19def488 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [320-946-05-10](https://asc.understandingaccounting.org/asc/320/946/#320-946-05-10) Pending content: no Source downloaded (UTC): 2026-09-09T23:36:36.772Z to 2026-09-09T23:36:36.772Z Record version: sha256:f478806df90138a59fb242ffecae5e37d5bbf642c5b670c952267bff71950207 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Adverse economic developments often lead to increases in the default rates of high-yield and other debt securities. In addition to occasional [capital infusions](https://asc.understandingaccounting.org/glossary/c/#capital-infusions "Expenditures made directly to the issuer to ensure that operations are completed, thereby allowing the issuer to generate cash flows to service the debt. Such expenditures are usually nonrecurring. In certain cases, bondholders may receive additional promissory notes, or the original bond instrument may be amended to provide for repayment of the capital infusions."), professional fees to legally restructure the investments are frequently incurred by the bondholders.