{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/320/","source":"FASB Accounting Standards Codification, Basic View","usage":"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.","number":"320","title":"Investments—Debt Securities","area":"Assets","group":"32X Investments","subtopics":[{"number":"320-10","topic":"320","title":"Overall","area":"Assets","paragraphs":177,"summary":"ASC 320-10 governs the accounting and reporting for all investments in debt securities (post-ASU 2016-01, equity securities moved to Topic 321). At acquisition an entity must classify each debt security as trading, available-for-sale, or held-to-maturity (320-10-25-1) and document that classification (320-10-25-2); trading and AFS securities are carried at fair value (unrealized gains/losses in earnings and OCI, respectively) while HTM securities are carried at amortized cost (320-10-35-1). The Subtopic's core tension is the restrictive \"positive intent and ability to hold to maturity\" standard, the narrow list of sales/transfers that do not \"taint\" the HTM portfolio, and the required category disclosures.","concepts":["held-to-maturity classification","available-for-sale securities","trading securities","positive intent and ability","tainting the held-to-maturity portfolio","amortized cost basis","unrealized holding gains and losses","retrospective interest method"],"categories":["Financial instruments","Subsequent measurement","Presentation","Disclosure"],"level":"intermediate","topic_title":"Investments—Debt Securities","sections":[{"number":"00","label":"00 Status","anchor":"00-status","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"320-10-00-1","para":"00-1","html":"The following table identifies the changes made to this Subtopic.
The Codification contains several Topics for investments due to the differing accounting treatment for various forms of investment. The Topics include:
- a
Topic
320, Investments—Debt Securities
- aa
Topic 321, Investments—Equity Securities - b
Topic
323, Investments—Equity Method and Joint Ventures
- c
Topic
325, Investments—Other.
This Subtopic addresses the accounting and reporting for all investments in debt securities. - a
- b
The Scope Section of the Overall Subtopic establishes the scope for the Investments—Debt Securities Topic.
The guidance in the Investments—Debt Securities Topic applies to all entities, including the following entities that are not deemed to belong to specialized industries for purposes of this Topic:
- a
Cooperatives and mutual entities (such as credit unions and mutual insurance entities)
- b
The guidance in this Topic does not apply to the following entities:
- a
Entities in certain specialized industries. Entities whose specialized accounting practices include accounting for substantially all investments in debt securities at fair value, with changes in value recognized in earnings (income) or in the change in net assets. Examples of those entities are: - 1
Brokers and dealers in securities (Topic 940) - 2
Defined benefit pension, other postretirement, and health and welfare plans (Topics 960, 962, and 965) - 3
Investment companies (Topic 946).
This Topic does not apply to not-for-profit entities (NFPs). Subtopic 958-320 establishes standards for investments in debt securities by NFPs. The guidance in the Investments—Debt Securities Topic establishes standards of financial accounting and reporting for all investments in debt securities, including those resulting from the securitization of other financial instruments. - a
- b
The guidance in this Topic applies to all loans that meet the definition of a security.
The guidance in this Topic does not apply to any of the following:
- a
Derivative instruments that are subject to the requirements of Topic 815, including those that have been separated from a host contract as required by Section 815-15-25. If an investment would otherwise be in the scope of this Topic and it has within it an embedded derivative that is required by that Section to be separated, the host instrument (as described in that Section) remains within the scope of this Topic. - b
- c
- d
Investments in consolidated subsidiaries.
Paragraph 815-10-15-141 explains that the guidance in the Certain Contracts on Debt and Equity Securities Subsections applies to those forward contracts and purchased options that are not derivative instruments subject to Topic 815 but that involve the acquisition of securities that will be accounted for under Subtopic 320-10. For debt securities within its scope, Subtopic
310-20 provides incremental guidance on accounting for discounts and premiums.
For debt securities within its scope, Subtopic
325-40 provides incremental guidance on accounting for and reporting discount and credit losses.
At acquisition, an entity shall classify debt securities into one of the following three categories: - a
Trading securities.
If a security is acquired with the intent of selling it within hours or days, the security shall be classified as trading. However, at acquisition an entity is not precluded from classifying as trading a security it plans to hold for a longer period. Classification of a security as trading shall not be precluded simply because the entity does not intend to sell it in the near term. - b
Available-for-sale securities. Investments in debt securities not classified as trading securities or as held-to-maturity securities shall be classified as available-for-sale securities. - c
Held-to-maturity securities. Investments in debt securities shall be classified as held-to-maturity only if the reporting entity has the positive intent and ability to hold those securities to maturity.
At acquisition, an investor shall document the classification of debt securities.
Amortized cost is relevant only if a security is actually held to maturity. Use of the held-to-maturity category is restrictive because the use of amortized cost must be justified for each investment in a debt security. At acquisition, an entity shall determine if it has the positive intent and ability to hold a security to maturity, which is distinct from the mere absence of an intent to sell. If management's intention to hold a debt security to maturity is uncertain, it is not appropriate to carry that investment at amortized cost. In establishing intent, an entity shall consider pertinent historical experience, such as sales and transfers of debt securities classified as held-to-maturity. A pattern of sales or transfers of those securities is inconsistent with an expressed current intent to hold similar debt securities to maturity.
An entity shall not classify a debt security as held-to-maturity if the entity has the intent to hold the security for only an indefinite period. Consequently, a debt security shall not, for example, be classified as held-to-maturity if the entity anticipates that the security would be available to be sold in response to any of the following circumstances: - a
Changes in market interest rates and related changes in the security's prepayment risk
- b
Needs for liquidity (for example, due to the withdrawal of deposits, increased demand for loans, surrender of insurance policies, or payment of insurance claims)
- c
Changes in the availability of and the yield on alternative investments
- d
Changes in funding sources and terms
- e
Changes in foreign currency risk.
Specific scenarios in which a debt security shall not be classified as held-to-maturity (or where sale or transfer of a held-to-maturity security will call into question an investor's stated intent to hold other debt securities to maturity in the future) are as follows:
- a
A security shall not be classified as held-to-maturity if that security can contractually be prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment. The justification for using historical-cost-based measurement for debt securities classified as held-to-maturity is that no matter how market interest rates fluctuate, the holder will recover its recorded investment and thus realize no gains or losses when the issuer pays the amount promised at maturity. However, that justification does not extend to receivables purchased at a substantial premium over the amount at which they can be prepaid, and it does not apply to instruments whose payments derive from prepayable receivables but have no principal balance. Therefore, a callable debt security purchased at a significant premium might be precluded from held-to-maturity classification under paragraph 860-20-35-2 if it can be prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment. In addition, a mortgage-backed interest-only certificate shall not be classified as held-to-maturity. Paragraphs
provide further guidance on application of this paragraph.
Note that a debt security that is purchased late enough in its life such that, even if it was prepaid, the holder would recover substantially all of its recorded investment, could be initially classified as held-to-maturity if the conditions of this paragraph and paragraph 320-10-25-1 are met. (A debt security that can contractually be prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment may contain an embedded derivative. Therefore, such a security should be evaluated in accordance with Subtopic 815-15 to determine whether it contains an embedded derivative that needs to be accounted for separately.) - b
A debt security that is available to be sold in response to changes in market interest rates, changes in the security's prepayment risk, the entity's need for liquidity, changes in foreign exchange risk, or other similar factors shall not be included in the held-to-maturity category because the possibility of a sale is indicative that the entity does not have a positive intent and ability to hold the security to maturity. A debt security that is considered available to be sold as part of an entity's asset-liability management activities shall not be classified as held-to-maturity. Similarly, an entity that maintains a dynamic hedging program in which changes in external factors require that certain securities be sold to maintain an effective hedge would not have the intent and ability to hold those securities to maturity.
- c
Securities that may need to be sold to implement tax-planning strategies (for example, to generate taxable gains to offset existing taxable losses—or vice versa—or in response to changes in the entity's anticipated future profitability—for example, if taxable losses were expected for the next several years) should be classified as available-for-sale, not held-to-maturity.
- d
The sale of a held-to-maturity security in advance of any deterioration in the creditworthiness of the issuer, perhaps based solely on industry statistics, will call into question an investor's stated intent to hold other debt securities to maturity in the future. The sale of a held-to-maturity security must be in response to an actual deterioration, not mere speculation. That deterioration shall be supported by evidence about the issuer's creditworthiness; however, the entity need not await an actual downgrading in the issuer's published credit rating or inclusion on a credit watch list.
- e
The sale of held-to-maturity securities to meet regulatory capital requirements will call into question an investor's stated intent to hold other debt securities to maturity in the future. An entity's ability and intent to hold securities to maturity would be called into question by the sale of held-to-maturity securities to realize gains to replenish regulatory capital that had been reduced by a provision for loan losses. Gains trading with held-to-maturity securities to meet an entity's capital requirements is inconsistent with the held-to-maturity notion.
- f
The exercise of a put option on a security classified as held-to-maturity will call into question an investor's stated intent to hold other debt securities to maturity in the future. Furthermore, a puttable debt security might be precluded from held-to-maturity classification pursuant to paragraph 860-20-35-2. - g
Convertible debt securities shall not be classified as held-to-maturity. Classifying a security as held-to-maturity means that the entity is indifferent to future opportunities to profit from changes in the security's fair value and intends to accept the debt security's stipulated contractual cash flows, including the repayment of principal at maturity. Convertible debt securities generally bear a lower interest rate because the investor hopes to benefit from appreciation in value of the option embedded in the debt security. Given the unique opportunities for profit embedded in a convertible security, it generally would be contradictory to assert the positive intent and ability to hold a convertible debt security to maturity and forego the opportunity to exercise the conversion feature. The exercise of a conversion feature on a security classified as held-to-maturity will call into question an investor's stated intent to hold other debt securities to maturity in the future. (See Section 815-15-25 for additional guidance. If convertible debt is bifurcated into an equity option and a host debt instrument under the requirements of Subtopic 815-15, it generally still would be contradictory to assert the positive intent and ability to hold the debt host contract to maturity and forego the opportunity to exercise the conversion feature.) - h
A documented policy to initially classify all debt securities as held-to-maturity but then automatically transfer every security to available-for-sale when it reaches a predetermined point before maturity (for example, every held-to-maturity security will be transferred to available-for-sale 24 months prior to its stated maturity) so that an entity has the flexibility to sell securities is not consistent with the held-to-maturity classification. Under the policy described, the entity does not intend to hold any security to maturity.
- i
An insurance entity or other regulated entity shall not classify securities as held-to-maturity and also indicate to regulators that those securities could be sold to meet liquidity needs in a defined interest rate scenario whose likelihood of occurrence is reasonably possible but not probable.
The following changes in circumstances may cause the entity to change its intent to hold a certain security to maturity without calling into question its intent to hold other debt securities to maturity in the future. The sale or transfer of a held-to-maturity security due to one of the following changes in circumstances shall not be considered inconsistent with its original classification: - a
Evidence of a significant deterioration in the issuer's creditworthiness (for example, a downgrading of an issuer's published credit rating)
- b
A change in tax law that eliminates or reduces the tax-exempt status of interest on the debt security (but not a change in tax law that revises the marginal tax rates applicable to interest income)
- c
A major business combination or major disposition (such as sale of a component of an entity) that necessitates the sale or transfer of held-to-maturity securities to maintain the entity's existing interest rate risk position or credit risk policy - d
A change in statutory or regulatory requirements significantly modifying either what constitutes a permissible investment or the maximum level of investments in certain kinds of securities, thereby causing an entity to dispose of a held-to-maturity security
- e
A significant increase by the regulator in the industry's capital requirements that causes the entity to downsize by selling held-to-maturity securities
- f
A significant increase in the risk weights of debt securities used for regulatory risk-based capital purposes.
It is not appropriate to analogize to the exceptions specified in (a) through (f) in the preceding paragraph.
If a regulator directs a particular institution (rather than all institutions supervised by that regulator) to sell or transfer held-to-maturity securities (for example, to increase liquid assets), those sales or transfers are not consistent with paragraph 320-10-25-6(d), which describes a change in regulations applicable to all entities affected by the legislation or regulator enacting the change. (The same is true of paragraph 320-10-25-6(e) through (f).) However, it is possible that the circumstances causing a regulator to direct an institution to sell securities could be considered an event that is isolated, nonrecurring, and unusual that could not have been reasonably anticipated as described in the following paragraph and paragraph 320-10-25-6. In addition to the changes in circumstances listed in paragraph 320-10-25-6(a) through (f), certain other events may cause the entity to sell or transfer a held-to-maturity security without necessarily calling into question (tainting) its intent to hold other debt securities to maturity. Such events must meet all of the following four conditions to avoid tainting its intent to hold other debt securities to maturity in the future:
- a
The event is isolated.
- b
The event is nonrecurring.
- c
The event is unusual for the reporting entity.
- d
The event could not have been reasonably anticipated.
Other than extremely remote disaster scenarios (such as a run on a bank or an insurance entity), very few events would meet all four of those conditions.
Extremely remote disaster scenarios shall not be anticipated by an entity in deciding whether it has the positive intent and ability to hold a debt security to maturity.
With respect to the discussion in paragraph 320-10-25-6(c) about a major business combination or a major disposition, this Subtopic does not specify a quantitative threshold for a major business combination or disposition. Examples of transactions that would qualify for the exception in paragraph
320-10-25-6(c) are as follows:
- a
Sales of held-to-maturity securities only when the combination or disposition necessitates the sale or transfer of held-to-maturity securities to maintain the entity's existing interest rate risk position or credit risk policy. Necessary transfers or sales shall occur concurrent with or shortly after the business combination or disposition. This Subtopic does not define shortly. As time passes, however, it is increasingly difficult to demonstrate that the business combination, and not other events or circumstances, necessitated the transfer or sale of held-to-maturity securities.
- b
A sale of a component of an entity is an example of a major disposition.
Examples of transactions that would not qualify for the exception in paragraph
320-10-25-6(c) are as follows:
- a
A purchase or sale of a large pool of financial assets (for example, conforming mortgages) or liabilities (for example, deposit liabilities) (which would not be considered a major business combination or disposition)
- b
Sales of held-to-maturity securities to fund an acquisition (or a disposition, for example, if deposit liabilities are being assumed by the other party)
- c
Sales of held-to-maturity securities in anticipation of or otherwise before a major business combination or disposition
- d
A sale of held-to-maturity securities in response to an unsolicited tender offer from the issuer (which also is not an event that is isolated, nonrecurring, and unusual that could not have been reasonably anticipated).
Sales of debt securities that meet either of the following conditions may be considered as maturities for purposes of the classification of securities and the disclosure requirements under this Subtopic: - a
The sale of a security occurs near enough to its maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor. That is, the date of sale is so near the maturity or call date (for example, within three months) that changes in market interest rates would not have a significant effect on the security's fair value.
- b
The sale of a security occurs after the entity has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term. For variable-rate securities, the scheduled payments need not be equal.
Selling a debt security after a substantial portion of the principal has been collected shall be considered equivalent to holding the security to maturity. The collection of 85 percent of the principal outstanding at acquisition (not the principal outstanding at issuance for securities purchased in the secondary market) constitutes a reasonable threshold of what represents a substantial portion of the principal.
The limited practical exception in the preceding paragraph applies to both of the following: - a
Debt securities that are payable in equal installments that comprise both principal and interest, such as certain level-payment mortgage-backed securities. For example, many banks routinely sell their investments in mortgage-backed securities after a substantial portion of the principal has been recovered through prepayments. The tail portion of a mortgage-backed security is sold because it no longer represents an efficient investment to the entity mainly due to the economic costs of accounting for remnants of the original issue.
- b
Variable-rate debt securities when the scheduled payments would be payable in equal installments absent a change in interest rates.
It is not appropriate to apply the limited practical exception in paragraph 320-10-25-15 by analogy to a debt security that has a contractual payment schedule of level principal payments plus interest that accrues based on the declining outstanding principal balance; the payments on that type of security do not represent equal installments that are made up of both principal and interest. Specific scenarios in which a debt security may be classified as held to maturity (or where sale or transfer of a held-to-maturity security will not call into question an investor's stated intent to hold other debt securities to maturity in the future) are as follows:
- a
Although its asset-liability management may encompass consideration of the maturity and repricing characteristics of all investments in debt securities, an entity may decide that it can accomplish the necessary adjustments under its asset-liability management without having all of its debt securities available for disposition. In that case, the entity may choose to designate certain debt securities as unavailable to be sold to accomplish those ongoing adjustments deemed necessary under its asset-liability management, thereby enabling those debt securities to be accounted for at amortized cost on the basis of a positive intent and ability to hold them to maturity.
- b
The sale of one or more held-to-maturity securities if an entity chooses to downsize to comply with a significant increase in the industry's capital requirements would not call into question the classification of other held-to-maturity securities.
- c
In some circumstances it may not be possible to hold a security to its original stated maturity, such as when the security is called by the issuer before maturity. The issuer's exercise of the call option effectively accelerates the security's maturity and shall not be viewed as inconsistent with classification in the held-to-maturity category.
- d
A puttable debt security shall be classified as held-to-maturity only if the entity has the positive intent and ability to hold it to maturity.
- e
If a transfer of a held-to-maturity debt security is accounted for as a sale under Subtopic 860-20 and it is transferred for a reason other than those specified in paragraphs 320-10-25-6, 320-10-25-9, and 320-10-25-14, then the transfer would taint the held-to-maturity portfolio. However, if the transfer is accounted for as a secured borrowing, then the transfer would not taint the held-to-maturity portfolio. Transactions involving held-to-maturity securities that are not accounted for as sales under Subtopic 860-20 would not contradict an entity's stated intent to hold a security to maturity and, therefore, do not call into question the entity's intent to hold other debt securities to maturity. Examples of such transactions are as follows:
- 1
Held-to-maturity securities pledged as collateral, provided that the transaction is not accounted for as a sale under Subtopic 860-20 and the entity intends and expects to be able to satisfy the obligation and recover access to its collateral - 2
Held-to-maturity securities subject to a repurchase agreement or a securities lending agreement, provided that the transaction is accounted for as a secured borrowing under Subtopic 860-20 and the entity intends and expects to be able to repay the borrowing - 3
Beneficial interests classified as held-to-maturity that are desecuritized in a transaction that is not accounted for as a sale if the financial assets received in or that continue to be held after the desecuritization are held to maturity. Unless the debt instrument received or retained as a result of the transaction is held to maturity, the transaction would call into question the entity's intent to hold other debt securities to maturity. Desecuritizations are not specifically included within the scope of this paragraph. Nevertheless, that guidance is also appropriate for desecuritizations that are not accounted for as sales.
The following guidance discusses a specific type of transaction in which structured note securities are issued in combination with other structured note securities as a unit or a pair for the purpose of achieving a certain strategic investment result for the investor. One strategy involves the purchase of two structured notes with opposite interest rate reset provisions. Under that strategy, the fixed coupon rate or maturity date for each structured note would be determined shortly after issuance depending on movements in market interest rates. Following that reset date, the resulting yields on each of the structured note securities will move in opposite directions; however, the average yield of the two securities will generally reflect the market yield of the combined instruments in effect on the issuance date. See Example 2 (paragraph 320-10-55-20) for a common example of this strategy and of how the structured note transactions can be used to achieve one of many desired accounting results. If structured notes are acquired for the type of specified investment strategy described in paragraph 320-10-25-19, then the investor shall account for the two structured note securities as a unit until one of the securities is sold, at which time the notes shall be measured in the same way as a participating interest in paragraph 860-20-40-1A. Investments in
debt securities shall be measured subsequently as follows:
- a
- b
Available-for-sale securities. Investments in debt securities that are classified as available for sale shall be measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized except as indicated in the following sentences.All or a portion of the unrealized holding gain and loss of an available-for-sale security that is designated as being hedged in a fair value hedge that is not a portfolio layer method hedge shall be recognized in earnings during the period of the hedge, pursuant to paragraphs 815-25-35-1(b), 815-25-35-4, and 815-25-35-6. The portion of the unrealized holding gain and loss of a closed portfolio that includes an available-for-sale security or securities that is designated as being hedged in a portfolio layer method hedge pursuant to paragraph 815-20-25-12A shall be recognized in earnings during the period of the hedge pursuant to paragraphs 815-25-35-1(c), 815-25-35-4, and 815-25-35-6. - c
Held-to-maturity securities. Investments in debt securities classified as held to maturity shall be measured subsequently at amortized cost in the statement of financial position. A transaction gain or loss on a held-to-maturity foreign-currency-denominated debt security shall be accounted for pursuant to Subtopic 830-20.
Paragraphs
identify circumstances in which an entity must adjust the basis of its investment in debt securities of an equity method investee for the amount of an equity method loss based on the investment's seniority.
For investments accounted for in accordance with this Subtopic, the adjusted basis resulting from the application of paragraphs becomes the debt security's basis from which subsequent changes in fair value are measured. Dividend and interest income, including amortization of the premium and discount arising at acquisition, for all three categories of investments in debt securities shall be included in earnings.
At each reporting date, the appropriateness of the classification of an entity's investments in debt securities shall be reassessed. For example, if an entity no longer has the ability to hold debt securities to maturity, their continued classification as held-to-maturity would not be appropriate.
Because an entity is expected not to change its intent about a held-to-maturity security, the requirement to reassess the appropriateness of a security's classification focuses on the entity's ability to hold a security to maturity. The preceding paragraph acknowledges that facts and circumstances can change; for example, an entity can lose the ability to hold a debt security to maturity. However, that acknowledgment in no way diminishes the restrictive nature of the held-to-maturity category.
After securities are reclassified to available-for-sale in response to a taint, judgment is required in determining when circumstances have changed such that management can assert with a greater degree of credibility that it now has the intent and ability to hold debt securities to maturity.
A sale or transfer of a security classified as held-to-maturity that occurs for a reason other than those specified in paragraphs 320-10-25-6, 320-10-25-9, and 320-10-25-14, calls into question (taints) the entity's intent about all securities that remain in the held-to-maturity category. The entity makes the same assertion about all debt securities in the held-to-maturity category—namely, that it has the positive intent and ability to hold each security to maturity. Only a sale or transfer in response to certain changes in conditions will not call into question an entity's intent to hold other debt securities to maturity in the future. When a sale or transfer of held-to-maturity securities represents a material contradiction with the entity's stated intent to hold those securities to maturity or when a pattern of such sales has occurred, any remaining held-to-maturity securities shall be reclassified to available-for-sale. The reclassification shall be recorded in the reporting period in which the sale or transfer occurred and accounted for as a transfer under the following paragraph.
Transfers of a debt security from or into the trading category shall be accounted for at fair value. At the date of the transfer, the security's unrealized holding gain or loss shall be accounted for as follows: - a
For a security transferred from the trading category, the unrealized holding gain or loss at the date of the transfer will have already been recognized in earnings and shall not be reversed.
- b
For a security transferred into the trading category, the portion of the unrealized holding gain or loss at the date of the transfer that has not been previously recognized in earnings shall be recognized in earnings immediately.
- c
- d
For a debt security that is transferred into the available-for-sale category from the held-to-maturity category, an entity shall: - a
Reverse in earnings any allowance for credit losses previously recorded on the held-to-maturity debt security at the transfer date
- b
Reclassify and transfer the debt security to the available-for-sale category at its amortized cost basis (which is reduced by any previous writeoffs but excludes any allowance for credit losses) - c
Determine if an allowance for credit losses is necessary by following the guidance in Subtopic 326-30 - d
Report in other comprehensive income any unrealized gain or loss on the available-for-sale debt security at the date of transfer, excluding the amount recorded in the allowance for credit losses in accordance with paragraph (c)
- e
Consider whether the transfer of a debt security from the held-to-maturity category to the available-for-sale category calls into question the entity's intent and ability to hold securities that remain in the held-to-maturity category to maturity in accordance with paragraphs .
For a debt security that is transferred into the held-to-maturity category from the available-for-sale category, an entity shall:- a
Reverse in earnings any allowance for credit losses previously recorded on the available-for-sale debt security at the transfer date
- b
Reclassify and transfer the debt security to the held-to-maturity category at its amortized cost basis (which is reduced by any previous writeoffs but excludes any allowance for credit losses) plus or minus the amount of any remaining unrealized holding gain or loss reported in accumulated other comprehensive income
- c
Evaluate the debt security for an allowance for credit losses by following the guidance in Subtopic 326-20 - d
Continue to report the unrealized holding gain or loss at the date of the transfer in a separate component of shareholders' equity, such as accumulated other comprehensive income, but that gain or loss shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount (discussed in the following sentence) for that held-to-maturity security. For a debt security transferred into the held-to-maturity category, the transfer may create a premium or discount that, under amortized cost accounting, shall be amortized thereafter as an adjustment of yield in accordance with Subtopic 310-20 on receivables—nonrefundable fees and other costs.
Transfers from the held-to-maturity category should be rare, except for transfers due to the changes in circumstances identified in paragraph 320-10-25-6(a) through (f). In addition, given the nature of a trading security, transfers into or from the trading category also should be rare.
Available-for-sale securities shall not be automatically transferred to the trading category because the passage of time has caused the maturity date to be within one year or because management intends to sell the security within one year. Similarly, if an entity plans to sell a security from the held-to-maturity category in response to one of the conditions in paragraphs 320-10-25-6 and 320-10-25-9, the security shall not be automatically reclassified to available-for-sale or trading before the sale. Paragraph
860-10-55-75 gives an Example addressing whether a transferor has the option to classify debt securities as trading at the time of a transfer.
When a security is transferred from held-to-maturity to available-for-sale, the security's amortized cost basis carries over to the available-for-sale category for all of the following purposes: - a
The subsequent amortization of the historical premium or discount
- b
The comparisons of fair value and amortized cost for the purpose of determining unrealized holding gains and losses under paragraph 320-10-35-1 - c
The required disclosures of amortized cost.
When a security is transferred from available-for-sale to held-to-maturity, the transfer may create a premium or discount that, under amortized cost accounting, shall be amortized as a yield adjustment in accordance with Subtopic 310-20. The security's amortized cost basis is determined as the amortized cost basis at the transfer date (which is reduced by any previous writeoffs but excludes any allowance for credit losses) plus or minus the amount of any remaining unrealized holding gain or loss reported in accumulated other comprehensive income. An entity shall not consider a basis adjustment related to an existing portfolio layer method hedge designated in accordance with paragraph 815-20-25-12A in either of the following situations:- a
When determining whether a decline in fair value below the amortized cost basis of a security is other than temporary
- b
If measuring impairment of the individual investments or individual beneficial interest included in a closed portfolio hedged using the portfolio layer method.
For the individual securities or individual beneficial interest in a closed portfolio hedged using the portfolio layer method, the impairment assessment performed at the individual security level shall not consider the basis adjustment related to an existing portfolio layer method hedge.
The change in the fair value of foreign-currency-denominated available-for-sale debt securities, excluding the amount recorded in the allowance for credit losses, shall be reported in other comprehensive income. See Subtopic 326-30 for measuring credit losses on available-for-sale debt securities. In accordance with the guidance in Subtopic 326-30, an entity shall report credit losses on available-for-sale debt securities in the statement of financial performance as credit loss expense. This guidance addresses the accounting for certain structured notes that are in the form of debt securities, but does not apply to any of the following: - a
Mortgage loans or other similar debt instruments that do not meet the definition of a security under this Subtopic
- b
Traditional convertible bonds that are convertible into the stock of the issuer
- c
Multicurrency debt securities
- d
Debt securities classified as trading
- e
- f
Debt securities participating directly in the results of an issuer's operations (for example, participating mortgages or similar instruments)
- g
Reverse mortgages
- h
Structured note securities that, by their terms, suggest that it is reasonably possible that the entity could lose all or substantially all of its original investment amount (for other than failure of the borrower to pay the contractual amounts due). (Such securities shall be subsequently measured at fair value with all changes in fair value reported in earnings.)
Also, this guidance shall be applied to those beneficial interests involving securitized financial assets that do not involve contractual cash flows. This guidance does not address the issuer's accounting for structured note securities.
Entities shall use the retrospective interest method for recognizing income on structured note securities that are classified as available-for-sale or held-to-maturity debt securities and that meet any of the following conditions: - a
Either the contractual principal amount of the note to be paid at maturity or the original investment amount is at risk (for other than failure of the borrower to pay the contractual amounts due). Examples include principal-indexed notes that base principal repayment on movements in the Standard & Poor's S&P 500 Index or notes that base principal repayment on the occurrence of certain events or circumstances.
- b
The note's return on investment is subject to variability (other than due to credit rating changes of the borrower) because of either of the following:
- 1
There is no stated coupon rate or the stated coupon is not fixed or prespecified, and the variation in the return on investment or coupon rate is not a constant percentage of, or in the same direction as, changes in market-based interest rates or interest rate index, for example, the London Interbank Offered Rate (LIBOR) or the U.S. Treasury Bill Index.
- 2
The variable or fixed coupon rate is below market rates of interest for traditional notes of comparable maturity and a portion of the potential yield (for example, upside potential for principal) is based on the occurrence of future events or circumstances. (Examples of instruments that meet this condition include inverse floating-rate notes, dual-index floating notes, and equity-linked bear notes.)
- c
The contractual maturity of the bond is based on a specific index or on the occurrence of specific events or circumstances outside the control of the parties to the transaction, excluding the passage of time or events that result in normal covenant violations. Examples of instruments that meet this condition include index amortizing notes and notes that base contractual maturity on the price of oil.
Under the retrospective interest method, the income recognized for a reporting period would be measured as the difference between the amortized cost of the security at the end of the period and the amortized cost at the beginning of the period, plus any cash received during the period. The amortized cost would be 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 estimated future cash flow streams to the initial investment. If the effective yield is negative (that is, the sum of the newly estimated undiscounted cash flows is less than the security's amortized cost), the amortized cost would be calculated using a zero percent effective yield. Example 1 (see paragraph 320-10-55-16) illustrates the application of the retrospective interest method. For purposes of determining the effective yield at which income will be recognized, all estimates of future cash flows shall be based on quoted forward market rates or prices in active markets, when available; otherwise, they shall be based on current spot rates or prices as of the reporting date.
Section 860-10-40 provides guidance on determining whether a transfer of securities shall be accounted for as a sale. With respect to trading securities, because all changes in a trading security's fair value are reported in earnings as they occur, the sale of a trading security does not necessarily give rise to a gain or loss. Generally, a debit to cash (or trade date receivable) is recorded for the sales proceeds, and a credit is recorded to remove the security at its fair value (or sales price). If the entity is not taxed on the changes in fair value, the deferred tax accounts would be adjusted. Some adjustment to this procedure will be necessary for entities that have not yet recorded the security's change in fair value up to the point of sale (perhaps because fair value changes are recorded at the end of each day). Although entities have different bookkeeping methods for available-for-sale securities, generally, a sale of an available-for-sale security shall be recorded by a debit to cash (or trade date receivable) for the sales proceeds, and a credit to remove the security at its fair value (or sales price). The amount recorded in other comprehensive income, representing the unrealized gain or loss at the date of sale, is reversed into earnings, and the deferred tax accounts are adjusted. Some adjustment to this procedure will be necessary for entities that have not yet recorded the security's change in fair value up to the point of sale (perhaps because fair value changes are recorded at the end of each interim period) or when write-downs have been recognized. As discussed in paragraph 320-10-25-20, if structured notes are acquired for the type of specified investment strategy described in paragraph 320-10-25-19, then the investor should account for the two structured note securities as a unit until one of the securities is sold, at which time the notes shall be measured in the same way as a participating interest in paragraph 860-20-40-1A. An entity shall report its investments in available-for-sale securities and trading securities separately from similar assets that are subsequently measured using another measurement attribute on the face of the statement of financial position. To accomplish that, an entity shall do either of the following: - a
Present the aggregate of those fair value and non-fair-value amounts in the same line item and parenthetically disclose the amount of fair value included in the aggregate amount - b
Present two separate line items to display the fair value and non-fair-value carrying amounts.
Entities also shall refer to the guidance in paragraph 825-10-45-1A on disaggregation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables). An entity that presents a classified statement of financial position shall report individual held-to-maturity securities, individual available-for-sale securities, and individual trading securities as either current or noncurrent, as appropriate, under the guidance of Section 210-10-45. This Subtopic does not specify the income statement classification of gains and losses for transfers involving trading securities. However, gains and losses that have accumulated before the transfer shall be classified consistently with realized gains and losses for the category from which the security is being transferred, not the category into which the security is being transferred. Paragraph 320-10-35-1 explains that all or a portion of the unrealized holding gain and loss of an available-for-sale security that is designated as being hedged in a fair value hedge shall be recognized in earnings during the period of the hedge, pursuant to paragraphs 815-25-35-1 and 815-25-35-4. An entity shall present the amounts reversed or established for the allowance for credit losses related to the transfer of debt securities between categories (see paragraphs ) on a gross basis in the income statement. An entity may present those amounts on the income statement or in the notes to financial statements, if applicable. Subsequent increases or decreases in the fair value of available-for-sale securities that do not result in recognition or reversal of an allowance for credit loss or write-down in accordance with Subtopic 326-30 on measuring credit losses on available-for-sale debt securities shall be included in other comprehensive income pursuant to paragraphs 320-10-35-1(b) and 320-10-45-8. Paragraph 740-20-45-11(b) provides guidance on reporting the tax effects of unrealized holding gains and losses reported in other comprehensive income. Cash flows from purchases, sales, and maturities of available-for-sale securities and held-to-maturity securities shall be classified as cash flows from investing activities and reported gross for each security classification in the statement of cash flows. Cash flows from purchases, sales, and maturities of trading securities shall be classified based on the nature and purpose for which the securities were acquired.
Paragraph 230-10-45-8 permits reporting activity in cash equivalents as a net change. However, securities that are considered cash equivalents are subject to the accounting and disclosure requirements of this Subtopic, such as disclosure of amortized cost and fair value by major security types. This Subtopic does not require the presentation of individual amounts for the three categories of investments on the face of the statement of financial position, provided the information is disclosed in the notes. Thus, entities that report certain investments in debt securities as cash equivalents in accordance with the provisions of Topic 230 can continue that practice, provided that the notes reconcile the reporting classifications used in the statement of financial position. This Section provides disclosure guidance on information about
debt securities that is required to be presented in the financial statements.
The disclosures in this Section are required for all interim and annual periods when complete sets of financial statements are provided by an entity. The disclosures in this Section are not required when an entity provides summarized interim financial information. The minimum disclosure requirements for summarized interim financial information issued by publicly traded entities are established in paragraph 270-10-50-1. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1The disclosures in this Section are required for each interim and annual period. Major security types shall be based on the nature and risks of the security.In determining whether disclosure for a particular security type is necessary and whether it is necessary to further separate a particular security type into greater detail, an entity shall consider all of the following:- a
(Shared) activity or business sector
- b
Vintage
- c
Geographic concentration
- d
Credit quality
- e
Economic characteristic.
For securities classified as available for sale, all reporting entities shall disclose all of the following by major security type as of each date for which a statement of financial position is presented: - a
Amortized cost basis
- aa
- aaa
Total allowance for credit losses
- b
Total unrealized gains for securities with net gains in accumulated other comprehensive income
- c
Total unrealized losses for securities with net losses in accumulated other comprehensive income
- d
Information about the contractual maturities of those securities as of the date of the most recent statement of financial position presented.
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1For securities classified as available for sale, all reporting entities shall disclose all of the following by major security type as of each interim and annual date for which a statement of financial position is presented: - a
Amortized cost basis
- aa
- aaa
Total allowance for credit losses
- b
Total unrealized gains for securities with net gains in accumulated other comprehensive income
- c
Total unrealized losses for securities with net losses in accumulated other comprehensive income
- d
Information about the contractual maturities of those securities as of the date of the most recent statement of financial position presented.
If for the purposes of identifying and measuring an impairment the applicable accrued interest is excluded from both the fair value and amortized cost basis of the available-for-sale debt security, an entity may, as a practical expedient, exclude the applicable accrued interest that is included in the amortized cost basis for the purposes of the disclosure requirements in paragraph 320-10-50-2. If an entity elects this practical expedient, it shall disclose the total amount of accrued interest, net of the allowance for credit losses (if any), excluded from the disclosed amortized cost basis. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1If for the purposes of identifying and measuring an impairment the applicable accrued interest is excluded from both the fair value and amortized cost basis of the available-for-sale debt security, an entity may, as a practical expedient, exclude the applicable accrued interest that is included in the amortized cost basis for the purposes of the disclosure requirements in paragraph 320-10-50-2. If an entity elects this practical expedient, it shall disclose the total amount of accrued interest, net of the allowance for credit losses (if any), excluded from the disclosed amortized cost basis in interim and annual reporting periods. Maturity information may be combined in appropriate groupings. In complying with this requirement, financial institutions (see paragraph 942-320-50-1) shall disclose the fair value and the net carrying amount (if different from fair value) of debt securities on the basis of at least the following four maturity groupings: - a
Within 1 year
- b
After 1 year through 5 years
- c
After 5 years through 10 years
- d
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings; if allocated, the basis for allocation also shall be disclosed. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1Maturity information may be combined in appropriate groupings. In complying with this requirement, financial institutions (see paragraph 942-320-50-1) shall disclose the fair value and the net carrying amount (if different from fair value) of debt securities in interim and annual reporting periods on the basis of at least the following four maturity groupings: - a
Within 1 year
- b
After 1 year through 5 years
- c
After 5 years through 10 years
- d
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings; if allocated, the basis for allocation also shall be disclosed in interim and annual reporting periods.All reporting entities shall disclose the following for securities classified as held to maturity by major security type as of each date for which a statement of financial position is presented: - a
Amortized cost basis
- aa
- aaa
Total allowance for credit losses
- b
- c
- d
Net carrying amount
- dd
- e
Gross gains and losses in accumulated other comprehensive income for any derivatives that hedged the forecasted acquisition of the held-to-maturity securities
- f
Information about the contractual maturities of those securities as of the date of the most recent statement of financial position presented. (Maturity information may be combined in appropriate groupings.
In complying with this requirement, financial institutions [see paragraph 942-320-50-1] shall disclose the net carrying amount of debt securities on the basis of at least the following four maturity groupings:- 1
Within one year
- 2
After one year through five years
- 3
After 5 years through 10 years
- 4
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings; if allocated, the basis for allocation also shall be disclosed.)
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1All reporting entities shall disclose the following for securities classified as held to maturity by major security type as of each interim and annual reporting date for which a statement of financial position is presented: - a
Amortized cost basis
- aa
- aaa
Total allowance for credit losses
- b
- c
- d
Net carrying amount
- dd
- e
Gross gains and losses in accumulated other comprehensive income for any derivatives that hedged the forecasted acquisition of the held-to-maturity securities
- f
Information about the contractual maturities of those securities as of the date of the most recent statement of financial position presented. (Maturity information may be combined in appropriate groupings.
In complying with this requirement, financial institutions [see paragraph 942-320-50-1] shall disclose the net carrying amount of debt securities on the basis of at least the following four maturity groupings:- 1
Within one year
- 2
After one year through five years
- 3
After 5 years through 10 years
- 4
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings; if allocated, the basis for allocation also shall be disclosed.)
A public business entity shall disclose the following information for securities classified as held to maturity, by major security type, as of each date for which a statement of financial position is presented:- a
Aggregate fair value
- b
Gross unrecognized holding gains
- c
Gross unrecognized holding losses.
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1A public business entity shall disclose the following information for securities classified as held to maturity, by major security type, as of each interim and annual reporting date for which a statement of financial position is presented:- a
Aggregate fair value
- b
Gross unrecognized holding gains
- c
Gross unrecognized holding losses.
A financial institution that is a public business entity shall disclose the fair value of the debt securities classified as held to maturity, by major security type, on the basis of at least the following four maturity groupings: - a
Within 1 year
- b
After 1 year through 5 years
- c
After 5 years through 10 years
- d
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings; if allocated, the basis for allocation also shall be disclosed. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1For interim and annual reporting periods, a financial institution that is a public business entity shall disclose the fair value of the debt securities classified as held to maturity, by major security type, on the basis of at least the following four maturity groupings: - a
Within 1 year
- b
After 1 year through 5 years
- c
After 5 years through 10 years
- d
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings; if allocated, the basis for allocation also shall be disclosed in interim and annual reporting periods.If for the purposes of identifying and measuring an impairment the applicable accrued interest is excluded from the amortized cost basis of held-to-maturity securities, an entity may, as a practical expedient, exclude the accrued interest receivable balance that is included in the amortized cost basis of the held-to-maturity securities for the purposes of the disclosure requirements in paragraph 320-10-50-5. If an entity applies this practical expedient, it shall disclose the total amount of accrued interest, net of the allowance for credit losses (if any), excluded from the disclosed amortized cost basis. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1If for the purposes of identifying and measuring an impairment the applicable accrued interest is excluded from the amortized cost basis of held-to-maturity securities, an entity may, as a practical expedient, exclude the accrued interest receivable balance that is included in the amortized cost basis of the held-to-maturity securities for the purposes of the disclosure requirements in paragraph 320-10-50-5. If an entity applies this practical expedient, it shall disclose the total amount of accrued interest, net of the allowance for credit losses (if any), excluded from the disclosed amortized cost basis in interim and annual reporting periods.For each period for which the results of operations are presented, an entity shall disclose all of the following: - a
The proceeds from sales of available-for-sale securities and the gross realized gains and gross realized losses that have been included in earnings as a result of those sales - b
The basis on which the cost of a security sold or the amount reclassified out of accumulated other comprehensive income into earnings was determined (that is, specific identification, average cost, or other method used)
- c
The gross gains and gross losses included in earnings from transfers of securities from the available-for-sale category into the trading category - d
The amount of the net unrealized holding gain or loss on available-for-sale securities for the period that has been included in accumulated other comprehensive income and the amount of gains and losses reclassified out of accumulated other comprehensive income into earnings for the period - e
The portion of trading gains and losses for the period that relates to trading securities still held at the reporting date.
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1For each interim and annual reporting period for which the results of operations are presented, an entity shall disclose all of the following: - a
The proceeds from sales of available-for-sale securities and the gross realized gains and gross realized losses that have been included in earnings as a result of those sales - b
The basis on which the cost of a security sold or the amount reclassified out of accumulated other comprehensive income into earnings was determined (that is, specific identification, average cost, or other method used)
- c
The gross gains and gross losses included in earnings from transfers of securities from the available-for-sale category into the trading category - d
The amount of the net unrealized holding gain or loss on available-for-sale securities for the period that has been included in accumulated other comprehensive income and the amount of gains and losses reclassified out of accumulated other comprehensive income into earnings for the period - e
The portion of trading gains and losses for the period that relates to trading securities still held at the reporting date.
For any sales of or transfers from securities classified as held-to-maturity, an entity shall disclose all of the following in the notes to financial statements for each period for which the results of operations are presented: - a
The net carrying amount of the sold or transferred security
- b
The net gain or loss in accumulated other comprehensive income for any derivative that hedged the forecasted acquisition of the held-to-maturity security
- c
The related realized or unrealized gain or loss
- d
The circumstances leading to the decision to sell or transfer the security. (Such sales or transfers should be rare, except for sales and transfers due to the changes in circumstances identified in paragraph 320-10-25-6(a) through (f).)
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1For any sales of or transfers from securities classified as held-to-maturity, an entity shall disclose all of the following in the notes to financial statements for each interim and annual reporting period for which the results of operations are presented: - a
The net carrying amount of the sold or transferred security
- b
The net gain or loss in accumulated other comprehensive income for any derivative that hedged the forecasted acquisition of the held-to-maturity security
- c
The related realized or unrealized gain or loss
- d
The circumstances leading to the decision to sell or transfer the security. (Such sales or transfers should be rare, except for sales and transfers due to the changes in circumstances identified in paragraph 320-10-25-6(a) through (f).)
Paragraph 320-10-25-14 sets forth the conditions under which sales of debt securities may be considered as maturities for purposes of the disclosure requirements under paragraph 320-10-50-10. All sales or transfers of held-to-maturity securities are subject to the disclosure requirements of paragraph 320-10-50-10, regardless of the treatment of remaining held-to-maturity securities. The portion of trading gains and losses for the period related to trading securities still held at the reporting date (required by paragraph 320-10-50-9(e)) is calculated as follows. This implementation guidance discusses the scope application of this Topic to the following instruments and transactions.
- a
Certain debt securities
- b
- c
- d
Short sales of debt securities.
All of the following debt instruments are within the scope of this Topic if they meet the definition of a
debt security:
- 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. See paragraph 310-20-40-10 for additional information. - 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. - 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.
- 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.
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.
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 with respect to broker-dealers and paragraph 942-405-25-1 with respect to depository institutions). For guidance on evaluating whether a short sale transaction involves a derivative instrument, see paragraph 815-10-55-57. 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.
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. The following are descriptions of various
structured notes, using illustrative terms:
- 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.
- 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).
- 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.
- d
Delevered floater. A bond with a coupon rate of interest that lags overall movements in specified general interest rate levels or indexes.
- 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.
- 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.
- 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.
- h
Stepped cap-floor floaters. A bond that pays a floating rate of interest, subject to a scheduled cap, scheduled floor, or both.
- i
Floating to floating notes. Varying coupon (first-year LIBOR or U.S. Treasury bill based, second-year prime based).
- 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).
- 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.
- 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.
- 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).
- 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).
- o
Crude oil knock-in notes. 1% coupon, principal guaranteed with upside potential based on the strength of the oil market.
- 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.
- q
Gold-linked bull note. Fixed 3% coupon, principal is guaranteed with upside potential if the price of gold increases.
- r
Equity-linked bear note. Fixed 4% coupon, principal is guaranteed with upside potential if a specified Standard & Poor's index falls.
- 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.
- 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.
- u
Credit-sensitive bond. A bond that has a coupon rate of interest that resets based on changes in an entity's credit rating.
- 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.
- 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.
- 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 in cash.
Paragraph
320-10-35-40 requires the
retrospective interest method 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: - a
Calculate the effective yield that equates all past actual cash flows and current estimates of future cash flows to the initial investment amount.
- 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.
- c
Adjust the amortized cost balance to the amount calculated in (b) with the offsetting amount recognized as income for the period.
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.
Example 1 (see paragraph
320-10-55-16) illustrates application of the retrospective interest method.
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. - 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.
- 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).
- 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).
- 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.
The substance of the investment strategy provided in Example 2 (see paragraph 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. This Example illustrates the guidance in paragraphs
. This Example has the following assumptions:
- a
The investor purchases a 3-year, $100 par value structured note at par.
- 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.
- 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.
![](\"/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.
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. ![](\"/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) - -
These cash flows produce an effective yield of negative 0.71 percent.
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).
This Example illustrates the guidance in paragraphs
.
An entity purchases two separate structured notes with opposite interest rate characteristics. The terms of the bonds are described below. ![](\"/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.\"
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).
The following table illustrates the accounting for a transfer from available-for-sale to held-to-maturity. ![](\"/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.
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 requires that the unrealized holding gain or loss 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. Paragraph superseded on 04/13/2010 after the end of the transition period stated in FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.
The following table identifies the changes made to this Subtopic.
See paragraph 320-10-S99-2, SEC Staff Announcement: Adjustments in Assets and Liabilities for Holding Gains and Losses as Related to the Implementation of Topic 320 for SEC Staff views on adjusting certain assets and liabilities upon the implementation of Topic 320 as if unrealized holding gains or losses from securities classified as available for sale had been realized. See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.2, for disclosure requirements for marketable securities. See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.12, for disclosure requirements for other investments. The following is the text of SEC Staff Announcement: Adjustments in Assets and Liabilities for Holding Gains and Losses as Related to the Implementation of Subtopic
320-10.
The SEC staff has been asked whether certain assets and liabilities, such as noncontrolling interests, certain life insurance policyholder liabilities, deferred acquisition costs, and intangible assets arising from insurance contracts acquired in business combinations, should be adjusted with a corresponding adjustment to other comprehensive income at the same time unrealized holding gains and losses from securities classified as available-for-sale are recognized in other comprehensive income. That is, should the carrying value of these assets and liabilities be adjusted to the amount that would have been reported had unrealized gains and losses been realized?
Paragraph 740-20-45-11(b) addresses specifically the classification of the deferred tax effects of unrealized holding gains and losses reported in other comprehensive income. Paragraph 740-20-45-11(b) requires that the tax effects of those gains and losses be reported as charges or credits directly to other comprehensive income. That is, the recognition of unrealized holding gains and losses in equity may create temporary differences for which deferred taxes would be recognized, the effect of which would be reported in accumulated other comprehensive income along with the related unrealized holding gains and losses. Therefore, deferred tax assets and liabilities are required to be recognized for the temporary differences relating to unrealized holding gains and losses as though those gains and losses actually had been realized, except the corresponding charges or credits are reported in other comprehensive income rather than as charges or credits to income in the statement of income. By analogy to paragraph 740-20-45-11(b), the SEC staff believes that, in addition to adjusting deferred tax assets and liabilities, registrants should adjust other assets and liabilities that would have been adjusted if the unrealized holding gains and losses from securities classified as available-for-sale actually had been realized. That is, to the extent that unrealized holding gains or losses from securities classified as available-for-sale would result in adjustments of noncontrolling interest, policyholder liabilities, deferred acquisition costs that are amortized using the gross-profits method, or intangible assets arising from insurance contracts acquired in business combinations that are amortized using the gross-profits method had those gains or losses actually been realized, the SEC staff believes that those balance sheet amounts should be adjusted with corresponding credits or charges reported directly to other comprehensive income. As a practical matter, the staff, at this time, would not extend those adjustments to other accounts such as liabilities for compensation to employees. The adjustments to asset accounts should be accomplished by way of valuation allowances that would be adjusted at subsequent balance sheet dates. For example, certain policyholder liabilities should be adjusted to the extent that liabilities exist for insurance policies that, by contract, credit or charge the policyholders for either a portion or all of the realized gains or losses of specific securities classified as available-for-sale. Further, asset amounts that are amortized using the gross-profits method, such as deferred acquisition costs accounted for under paragraphs 944-30-35-4 and 944-30-35-11 and certain intangible assets arising from insurance contracts acquired in business combinations, should be adjusted to reflect the effects that would have been recognized had the unrealized holding gains and losses actually been realized. Further, capitalized acquisition costs associated with insurance contracts covered by paragraphs 944-30-35-1A through 35-3A and 944-30-35-17 should not be adjusted for an unrealized holding gain or loss unless a \"premium deficiency\" would have resulted had the gain or loss actually been realized. This announcement should not affect reported net income. It addresses only the adjustment of certain assets and liabilities and the reporting of unrealized holding gains and losses from securities classified as available for sale.
The following table identifies the changes made to this Subtopic.
This Subtopic addresses investments in debt and equity securities by brokers and dealers in securities (broker-dealers). The guidance in this Subtopic is presented in the following two Subsections:
- a
General
- b
Proprietary Trading Securities.
The General Subsections provide guidance relating to clearance and settlement activities.
The Proprietary Trading Securities Subsections provide guidance on accounting for
proprietary transactions.
A broker-dealer may buy and sell securities for its own account. Broker-dealers frequently enter into matched-stock borrow and loan transactions as a finder or conduit, or enter into repurchase and reverse repurchase transaction agreements as part of a matched-book trading strategy. Further, complex trading strategies often involve numerous long and short positions in different products, so that those positions reflect a trading position that is different from its individual components (for example, box spreads, conversions, and reversals). The risk of nonperformance of regular-way trades is minimal given all of the following: - a
They are fully collateralized on the trade date.
- b
The period of time between trade date and settlement date is reasonably short.
- c
Most equity, U.S. government, and mortgage-backed agency securities are affirmed by both parties to the trade and settle net through a clearing entity.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
940-10-15, with specific qualifications noted below.
For guidance on investments in debt and equity securities that are part of a financial-restructuring transaction (as described in paragraphs
940-325-05-1,
940-325-30-1, and
940-325-35-1), see Subtopic
940-325.
The Proprietary Trading Securities Subsections follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
940-10-15, and apply to all broker-dealers involved in proprietary trading of securities.
The statement of financial condition shall reflect all regular-way trades on an accrual or trade-date basis. Risk, benefits, and economic potentials are created and conveyed at the trade date (that is, the inception of the contract), which is when the major terms have been agreed to by the parties. To properly reflect the economic effects of purchase and sale transactions for financial instruments (that is, to reflect the assumption of the risks and rewards resulting from changes in the value of financial instruments), broker-dealers shall account for the changes in value relating to all proprietary or principal transactions on a trade-date basis. For example, if the broker-dealer purchased financial instruments for its own account on the date of the statement of financial condition, the transaction shall be reflected in the broker-dealer's inventory with a corresponding credit to net receivable or payable for unsettled regular-way trades. If the exchange does not occur on the contracted settlement date (referred to as a fail-to-deliver or fail-to-receive), these transactions shall be recognized on the statement of financial condition as fails-to-receive or fails-to-deliver. Accrued interest earned on fixed-income securities shall be computed from the last coupon payment date up to the settlement date. This amount shall be paid to the seller of the instrument by the purchaser, who then receives the full periodic interest amount on the next coupon payment date.
A broker-dealer may buy and sell securities for its own account. Security positions resulting from proprietary trading shall be measured initially at fair value, including both of the following: - a
Inventory
- b
Obligations for short inventory positions.
Security positions resulting from proprietary trading shall be measured subsequently at fair value, including both of the following: - a
Inventory
- b
Obligations for short inventory positions.
Any unrealized gains or losses resulting from subsequent measurements of these to fair value shall be included in profit or loss.
The profit or loss shall be measured by the difference between the acquisition cost and the fair value.
For guidance on consolidation of majority-owned investee entities, see paragraph
940-810-45-1.
Proprietary securities transactions entered into by a broker-dealer for trading or investment purposes shall be included in securities owned and securities sold, not yet purchased.
Payables and receivables arising from unsettled regular-way trades may be recorded net in an account titled net receivable (or payable) for unsettled regular-way trades. The changes in the fair value of fixed-income securities owned that were purchased at a discount or premium is composed of accreted interest income or changes in the fair value of the securities or both. Consideration should be given to reporting these components separately as interest income and trading gains and losses, respectively. Trading gains and losses, which are composed of both realized and unrealized gains and losses, shall generally be presented net.
The income and expense resulting from complex trading strategies as described in paragraph 940-320-05-3 may be reflected net in the income statement, with disclosure of the gross components either on the face of the income statement or in the notes to financial statements. Broker-dealers shall report their trading securities activities in the operating section of the statement of cash flows.
If the gross income and expense components resulting from complex trading strategies are not disclosed on the face of the income statement in accordance with paragraph 940-320-45-6, they shall be disclosed in the notes to financial statements. The following table identifies the changes made to this Subtopic.
This Subtopic provides guidance regarding the recognition, measurement and disclosure of debt and equity securities by financial institutions.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
942-10-15.
The period of amortization or accretion for debt securities shall generally extend from the purchase date to the maturity date, unless other Topics are applicable.
For purposes of the disclosure requirements of paragraphs and 320-10-50-5 through 50-5C, the term financial institutions includes banks, savings and loan associations, savings banks, credit unions, finance companies, and insurance entities. The disclosures in paragraphs are required for interim and annual periods. In complying with the requirements in paragraph 942-320-50-1, financial institutions shall include in their disclosure all of the following major security types, although additional types also may be necessary: - a
Equity securities, segregated by any one of the following:
- 1
Industry type
- 2
Entity size
- 3
Investment objective.
- b
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies
- c
Debt securities issued by states of the United States and political subdivisions of the states
- d
Debt securities issued by foreign governments
- e
Corporate debt securities
- f
Residential mortgage-backed securities
- ff
Commercial mortgage-backed securities
- fff
Collateralized debt obligations
- g
Other debt obligations.
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1In complying with the requirements in paragraph 942-320-50-1, financial institutions shall include in their disclosure in interim and annual reporting periods all of the following major security types, although additional types also may be necessary: - a
Equity securities, segregated by any one of the following:
- 1
Industry type
- 2
Entity size
- 3
Investment objective.
- b
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies
- c
Debt securities issued by states of the United States and political subdivisions of the states
- d
Debt securities issued by foreign governments
- e
Corporate debt securities
- f
Residential mortgage-backed securities
- ff
Commercial mortgage-backed securities
- fff
Collateralized debt obligations
- g
Other debt obligations.
Investments in mutual funds that invest only in U.S. government debt securities may be shown separately rather than grouped with other equity securities in the disclosures by major security type required by paragraph 942-320-50-2. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1For interim and annual reporting periods, investments in mutual funds that invest only in U.S. government debt securities may be shown separately rather than grouped with other equity securities in the disclosures by major security type required by paragraph 942-320-50-2. In complying with this requirement, financial institutions shall disclose the net carrying amount of debt securities based on at least 4 maturity groupings: - a
Within 1 year
- b
After 1 year through 5 years
- c
After 5 years through 10 years
- d
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings. If allocated, the basis for allocation also shall be disclosed. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1In complying with this requirement, financial institutions shall disclose the net carrying amount of debt securities in interim and annual reporting periods based on at least 4 maturity groupings: - a
Within 1 year
- b
After 1 year through 5 years
- c
After 5 years through 10 years
- d
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings. If allocated, the basis for allocation also shall be disclosed.A financial institution that is a public business entity shall disclose the fair value of the debt securities based on at least 4 maturity groupings: - a
Within 1 year
- b
After 1 year through 5 years
- c
After 5 years through 10 years
- d
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings. If allocated, the basis for allocation also shall be disclosed. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1A financial institution that is a public business entity shall disclose the fair value of the debt securities in interim and annual reporting periods based on at least 4 maturity groupings: - a
Within 1 year
- b
After 1 year through 5 years
- c
After 5 years through 10 years
- d
After 10 years.
Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings. If allocated, the basis for allocation also shall be disclosed.The carrying amount of investment assets that serve as collateral to secure public funds, securities sold under repurchase agreements, and other borrowings, that are not otherwise disclosed under Topic 860, shall be disclosed in the notes to financial statements. (P) December 16, 2027; (N) December 16, 2028
270-10-65-1For interim and annual reporting periods, the carrying amount of investment assets that serve as collateral to secure public funds, securities sold under repurchase agreements, and other borrowings, that are not otherwise disclosed under Topic 860, shall be disclosed in the notes to financial statements. The notes to financial statements shall include an explanation of the institution's accounting policy for securities, including the basis for classification.
Regulators of financial institutions can, under appropriate circumstances, conclude that the continued ownership of any asset represents an undue safety and soundness risk to an institution and, accordingly, require the divestiture of that asset. It was not intended that a regulator's overall divestiture authority be considered as an automatic impairment of an institution's ability to hold any security to maturity, since impairment would have precluded any use of the held-to-maturity category by regulated financial institutions. However, specific facts and circumstances could indicate that an institution does not have the ability to hold a security to maturity.
The federal regulatory agencies note that only in rare circumstances have examiners required a financial institution to dispose of mortgage securities that have become high-risk after acquisition. Such circumstances have occurred only when examiners have determined that there is a significant safety and soundness concern with respect to a particular institution that has arisen from its holdings of these assets. The agencies note that examiners' divestiture authority is not unique to high-risk mortgage securities but rather is the same authority they have with respect to any other security or asset. Thus, the mere existence of examiners' divestiture authority for high-risk mortgage securities should not preclude an institution from concluding it has the intent and ability to hold to maturity those securities that were non-high-risk when acquired.
See paragraphs
,
948-310-30-4, and
for additional guidance concerning mortgage loans held as long-term investments.
The following table identifies the changes made to this Subtopic.
The following table identifies the changes made to this Subtopic.
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.
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 of securities while they are owned by the fund. High-yield debt securities (junk bonds) take various forms. The most common forms may include zero-coupon bonds, payment-in-kind bonds, and deep-discount step bonds. 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. 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: - 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.
- 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.
- 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.
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).
Interest receivable from debt securities generally comprises both of the following distinct components: - a
Interest purchased from the previous bondholder
- b
Interest accrued by the investment company during the holding period.
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.
Adverse economic developments often lead to increases in the default rates of high-yield and other debt securities. In addition to occasional capital infusions, professional fees to legally restructure the investments are frequently incurred by the bondholders. This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
946-10-15, with instrument qualifications noted below.
Securities that have no credit rating shall be classified as high-yield debt securities if they otherwise have the characteristics of such securities. An investment company shall record security purchases and sales as of the trade date, the date on which the investment company agrees to purchase or sell the securities, so that the effects of all securities trades entered into by or for the account of the investment company to the date of a financial report are included in the financial report.
A securities transaction outside conventional channels, such as through a private placement or by submitting shares in a tender offer, shall be recorded as of the date the investment company obtained a right to demand the securities purchased or to collect the proceeds of sale, and incurred an obligation to pay the price of the securities purchased or to deliver the securities sold, respectively. Determining the recording date may sometimes require an interpretation by legal counsel.
Even if the investment company tenders its securities, it shall continue to value the shares tendered until the number of shares accepted in the tender is known. Thereafter, the investment company shall value the assets to be received for the shares tendered.
Investment companies shall record dividend income on the ex-dividend date, not on the declaration, record, or payable date, because on the ex-dividend date the quoted market price of listed securities and other market-traded securities tends to be affected by the exclusion of the dividend declared. Also, investment companies shall record liabilities for dividends to shareholders on the ex-dividend or ex-distribution date because mutual fund shares are purchased and redeemed at prices equal to or based on net asset value. Investors purchasing shares between the declaration and ex-dividend dates are entitled to receive the dividend, whereas investors purchasing shares on or after the ex-dividend date are not entitled to the dividend.
An investment company shall initially measure its investments in debt and equity securities at their transaction price. The transaction price shall include commissions and other charges that are part of the purchase transaction.
An investment company may receive securities in a spinoff wherein the entity in which the investment company has invested spins off a portion of its operations. A portion of the cost of the securities held shall be allocated to the securities received in the spinoff.
The amount allocated to securities received in a spinoff shall be based on the ratio of the fair value of the securities received to the sum of the fair value of such securities and the fair value of the original securities held by the investment company of the entity effecting the spinoff.
Payment-in-kind bonds typically trade flat (that is, interest receivable is included in the market value quote obtained each day). Accordingly, that portion of the quote representing interest income needs to be identified. The sum of the acquisition amount of the bond and the discount to be amortized shall not exceed the undiscounted future cash collections that are both reasonably estimable and probable. An investment company shall measure investments in debt and equity securities subsequently at fair value. Valuing market-traded securities—that is, securities listed and traded on one or more securities exchanges, or unlisted securities traded regularly in over-the-counter markets (for example, U.S. Treasury bonds, notes and bills or stocks traded in the National Market System of the National Association of Securities Dealers Automated Quotations [NASDAQ] Stock Market)—ordinarily is not difficult, because quotations of completed transactions are published daily, or price quotations are readily obtainable from financial reporting services or individual broker-dealers.
A security traded in an active market on the valuation date shall be valued at the last quoted sales price.
In general, the discussion of valuation of securities in this Subtopic also applies to foreign securities. Portfolio securities that are traded primarily on foreign securities exchanges shall be valued at the functional currency (usually the U.S. dollar equivalent) values for such securities on their exchanges.
Dividends on investment securities shall be recorded on the ex-dividend date. Distributions that represent returns of capital shall be credited to investment cost rather than to investment income. Stock splits and stock dividends in shares of the same class as the shares owned are not income to the investment company. However, dividends for which the recipient has the choice to receive cash or stock are usually recognized as investment income in the amount of the cash option, because in such cases cash is usually the best evidence of fair value of the stock.
Other noncash dividends shall be recognized as investment income at the fair value of the property received.
Stock rights (that is, subscription rights) received shall be allocated a prorated portion of the cost basis of the related investment; however, allocation is not required if the fair value of the rights is 15 percent or less of the fair value of the investment company's holdings.
Cash dividends declared on stocks for which the securities portfolio reflects a short position as of the record date shall be recognized as an expense on the ex-dividend date.
An investment company shall use the interest method (see paragraph 835-30-35-2) to determine interest income on payment-in-kind bonds. To the extent that interest income to be received in the form of baby bonds is not expected to be realized, a reserve against income shall be established. Specifically, the investment company shall determine periodically that the total amount of interest income recorded as receivable, plus the initial cost of the underlying payment-in-kind bond, does not exceed the fair value of those assets. Income on step bonds should be recognized using the interest method (see paragraph 835-30-35-2). To the extent that interest income is not expected to be realized, a reserve against income shall be established. Specifically, the sum of the acquisition amount of the bond and the discount to be amortized shall not exceed the undiscounted future cash collections that are both reasonably estimable and probable.
All capital infusions shall be recorded as additions to the cost bases of related securities. Workout expenditures that are incurred as part of negotiations of the terms and requirements of capital infusions, or that are expected to result in the restructuring of or a plan of reorganization for an investment shall be recorded as realized losses. Ongoing expenditures to protect or enhance an investment, or expenditures incurred to pursue other claims or legal actions, shall be treated as operating expenses.
The portion of interest receivable on defaulted debt securities written off that was recognized as interest income shall be treated as a reduction of interest income.
Writeoffs of purchased interest should be reported as both of the following: - a
Increases to the cost basis of the security
- b
Unrealized losses until the security is sold.
Those reserves shall be recorded when they become probable and estimable in accordance with the guidance in Subtopic 450-20. Premiums and discounts shall be amortized using the interest method. The amortization of premiums on purchased callable debt securities that have explicit, noncontingent call features that are callable at fixed prices on preset dates shall be consistent with the guidance in paragraph 310-20-35-33. Proceeds from litigation relating to an investment security shall be accounted for as follows: - a
If the investment company holds the securities, the proceeds are accounted for as a reduction of cost.
- b
If the investment company no longer holds the securities, the proceeds are accounted for as realized gains on security transactions.
The cost of investment securities held in the portfolio of an investment company and the net realized gains or losses thereon shall be determined on the specific identification or average-cost methods. An investment company shall use only one method for all of its investments.
For presentation of investments in debt and equity securities as part of reporting financial position, see Section
946-210-45.
For disclosures about investments in debt and equity securities as part of a schedule of investments, see Section
946-210-50.
The following table identifies the changes made to this Subtopic.
See paragraph 946-320-S99-11, CFRR 404.03.a, for the recognition requirements for certain investment securities. See paragraph 946-320-S99-17, CFRR 404.04.a, for the recognition requirements for restricted securities. See paragraph 946-10-S99-3, Regulation S-X Rule 6-03(g), for the recognition requirements for dividend income. See paragraph 946-320-S99-9A, CFRR 404.02, for SEC views on accounting for purchased defaulted bonds with defaulted interest coupons attached. See paragraph 946-10-S99-3, Regulation S-X Rule 6-03(d), for the measurement requirements for qualified assets of face-amount certificate companies. See paragraph 946-320-S99-12, CFRR 404.03.b, for the valuation requirements for certain investment securities. See paragraph 946-320-S99-17, CFRR 404.04.a, for the valuation requirements for restricted securities. See paragraph 946-320-S99-20, CFRR 404.05, Money Market Funds, for subsequent valuation requirements for money market funds in valuing certain portfolio securities. See paragraph 946-10-S99-3, Regulation S-X Rule 6-03(d), for requirements for the presentation of investments at value. See paragraph 946-320-S99-9A, CFRR 404.02, for SEC views on accounting for purchased defaulted bonds with defaulted interest coupons attached. See paragraph 946-320-S99-11, CFRR 404.03.a, for the required disclosure in a situation where the propriety or validity of certain securities are not satisfactorily resolved. See paragraph 946-320-S99-12, CFRR 404.03.b, for disclosure requirements related to valuation policies. See paragraph 946-10-S99-3, Regulation S-X Rule 6-03(d), for the requirement to disclose the valuation method used for investments. See paragraphs 946-10-S99-3, Regulation S-X Rule 6-03(f), and 946-320-S99-13, CFRR 404.04.c, for required disclosures pertaining to the valuation of restricted securities. See paragraph 946-10-S99-3, Regulation S-X Rule 6-03(e), for required disclosures pertaining to qualified assets. See paragraph 946-320-S99-1, Regulation S-X Rule 12-12, for the requirements of Schedule I—Investments in Securities of Unaffiliated Issuers for management investment companies. See paragraph 946-320-S99-2, Regulation S-X Rule 12-12A, for the requirements of Schedule IV—Investments—Securities Sold Short for management investment companies. See paragraph 946-320-S99-3, Regulation S-X Rule 12-12B, for the requirements of Schedule V—Open Option Contracts Written for management investment companies. See paragraph 946-320-S99-4, Regulation S-X Rule 12-12C, for the requirements of Schedule VI—Summary Schedule of Investments in Securities of Unaffiliated Issuers for management investment companies. See paragraph 946-320-S99-5, Regulation S-X Rule 12-13, for the requirements of Schedule II—Investments—Other than Securities for management investment companies. See paragraph 946-320-S99-6, Regulation S-X Rule 12-14, for the requirements of Schedule III—Investments in Advances to Affiliates for management investment companies. See paragraph 946-320-S99-7, Regulation S-X Rule 12-15, for the requirements of Summary of Investments—Other than Investments in Related Parties. See paragraph 946-320-S99-8, Regulation S-X Rule 12-21, for the requirements of Schedule I—Investments in Securities of Unaffiliated Issuers for face-amount certificate investment companies. See paragraph 946-320-S99-9, Regulation S-X Rule 12-22, for the requirements of Schedule II—Investments in and Advances to Affiliates and Income Thereon for face-amount certificate investment companies. See paragraph 946-320-S99-12, CFRR 404.03.b., for Commission guidance on determining \"value.\" The following is the text of Regulation S-X Rule 12-12, Investments in Securities of Unaffiliated Issuers (17 CFR 210.12-12).
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Reg. § 210.12-12 Investments in Securities of Unaffiliated Issuers [For management investment companies only] Column A Column B Column C \"Name of issuer and title of issue1,2,3,4\" \"Balance held at close of period. Number of shares-principal amount of bonds and notes7\"\t\"Value of each item at close of period5,6,8,9,10\" 1\t\"Each issue shall be listed separately: Provided, however, that an amount not exceeding five percent of the total of Column C may be listed in one amount as “Miscellaneous securities,” provided the securities so listed are not restricted, have been held for not more than one year prior to the date of the related balance sheet, and have not previously been reported by name to the shareholders of the person for which the schedule is filed or to any exchange, or set forth in any registration statement, application, or annual report or otherwise made available to the public. If any securities are listed as Miscellaneous securities,” briefly explain in a footnote what the term represents.\" 2\t\"Categorize the schedule by (i) the type of investment (such as common stocks, preferred stocks, convertible securities, fixed income securities, government securities, options purchased, warrants, loan participations and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities, repurchase agreements, other investment companies, and so forth); and (ii) the related industry, country, or geographic region of the investment. Short-term debt instruments (i.e., debt instruments whose maturities or expiration dates at the time of acquisition are one year or less) of the same issuer may be aggregated, in which case the range of interest rates and maturity dates shall be indicated. For issuers of periodic payment plan certificates and unit investment trusts, list separately (i) trust shares in trusts created or serviced by the depositor or sponsor of this trust; (ii) trust shares in other trusts; and (iii) securities of other investment companies. Restricted securities shall not be combined with unrestricted securities of the same issuer. Repurchase agreements shall be stated separately showing for each the name of the party or parties to the agreement, the date of the agreement, the total amount to be received upon repurchase, the repurchase date and description of securities subject to the repurchase agreements.\" 3\t\"For options purchased, all information required by §210.12-13 for options contracts written should be shown. Options on underlying investments where the underlying investment would otherwise be presented in accordance with §§210.12-12, 12-13A, 12-13B, 12-13C, or 12-13D should include the description of the underlying investment as would be required by §§210.12-12, 12-13A, 12-13B, 12-13C, or 12-13D as part of the description of the option.\" 4\t\"Indicate the interest rate or preferential dividend rate and maturity date, as applicable, for preferred stocks, convertible securities, fixed income securities, government securities, loan participations and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities, repurchase agreements, or other instruments with a stated rate of income. For variable rate securities, indicate a description of the reference rate and spread and: (1) The end of period interest rate or (2) disclose the end of period reference rate for each reference rate described in the Schedule in a note to the Schedule. For securities with payment in kind, disclose the rate paid in kind.\" 5\t\"The subtotals for each category of investments, subdivided both by type of investment and industry, country or geographic region, shall be shown together with their percentage value compared to net assets. (§§210.6-04.19 or 210.6-05.4.) \" 6\tColumn C shall be totaled. The total of Column C shall agree with the correlative amounts shown on the related balance sheet. 7\t\"Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest payment date or date for the declaration of dividends prior to the date of the related balance sheet, there was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the effect that, on the last interest or dividend date, only partial interest was paid or partial dividends declared. If, on such respective last interest or dividend rate, no interest was paid or no cash or in kind dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to be income producing unless, during the last year preceding the date of the related balance sheet, there was at least one dividend paid upon such common shares.\" 8\t\"Indicate by an appropriate symbol each issue of restricted securities. State the following in a footnote: (a) as to each such issue (1) acquisition date, (2) carrying value per unit of investment at date of related balance sheet, e.g., a percentage of current market value of unrestricted securities of the same issuer, etc., and (3) the cost of such securities; (b) as to each issue acquired during the year preceding the date of the related balance sheet, the carrying value per unit of investment of unrestricted securities of the same issuer at: (1) The day the purchase price was agreed to and (2) the day on which an enforceable right to acquire such securities was obtained; and (c) the aggregate value of all restricted securities and the percentage which the aggregate value bears to net assets.\" 9\tIndicate by an appropriate symbol each issue of securities whose value was determined using significant unobservable inputs. 10\t\"Indicate by an appropriate symbol each issue of securities held in connection with open put or call option contracts, loans for short sales, or where any portion of the issue is on loan.\"
[81 FR 82014, Nov. 18, 2016] The following is the text of Regulation S-X Rule 12-12A, Investments—Securities Sold Short (17 CFR 210.12-12A).
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Reg. § 210.12.12A Investments-Securities Sold Short [For management investment companies only] Column A Column B Column C \"Name of issuer and title of issue1,2,3\" \" Balance of short position at close of period (Number of shares)\"\t\"Value of each open short position4,5,6\" 1\tEach issue shall be listed separately. 2\tCategorize the schedule as required by instruction 2 of §210.12-12. 3\t\"Indicate the interest rate or preferential dividend rate and maturity date, as applicable, for preferred stocks, convertible securities, fixed income securities, government securities, loan participations and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities, repurchase agreements, or other instruments with a stated rate of income. For variable rate securities, indicate a description of the reference rate and spread and: (1) The end of period interest rate or (2) disclose the end of period reference rate for each reference rate described in the Schedule in a note to the Schedule. For securities with payment in kind income, disclose the rate paid in kind.\" 4\t\"The subtotals for each category of investments, subdivided both by type of investment and industry, country, or geographic region, shall be shown together with their percentage value compared to net assets.\" 5\tColumn C shall be totaled. The total of Column C shall agree with the correlative amounts shown on the related balance sheet. 6\tIndicate by an appropriate symbol each issue of securities whose value was determined using significant unobservable inputs.
[81 FR 82015, Nov. 18, 2016] The following is the text of Regulation S-X Rule 12-12B, Summary Schedule of Investments in Securities of Unaffiliated Issuers (17 CFR 210.12-12B).
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Reg. § 210.12-12B Summary Schedule of Investments in Securities of Unaffiliated Issuers Column A Column B Column C Column D \"Name of Issuer and title of issue1,2,3,4,5,6,7,8\" \"Balance held at close of period. Number of shares—principal amount of bonds and notes10 \"\t\"Value of each item at close of period 2,9,11,12,13\"\tPercentage value compared to net assets 1\t\"Categorize the schedule by (a) the type of investment (such as common stocks, preferred stocks, convertible securities, fixed income securities, government securities, options purchased, warrants, loan participations and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities, repurchase agreements, other investment companies, and so forth); and (b) the related industry, country or geographic region of the investment.\" 2\t\"The subtotals for each category of investments, subdivided both by type of investment and industry, country, or geographic region, shall be shown together with their percentage value compared to net assets.\" 3\t\"Indicate the interest rate or preferential dividend rate and maturity date, as applicable, for preferred stocks, convertible securities, fixed income securities, government securities, loan participations and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities, repurchase agreements, or other instruments with a stated rate of income. For variable rate securities, indicate a description of the reference rate and spread and: (1) The end of period interest rate or (2) disclose the end of period reference rate for each reference rate described in the Schedule in a note to the Schedule. For securities with payment in kind income, disclose the rate paid in kind.\" 4\t\"Except as provided in note 6, list separately the 50 largest issues and any other issue the value of which exceeded one percent of net asset value of the registrant as of the close of the period. For purposes of the list (including, in the case of short-term debt instruments, the first sentence of note 4), aggregate and treat as a single issue, respectively, (a) short-term debt instruments (i.e., debt instruments whose maturities or expiration dates at the time of acquisition are one year or less) of the same issuer (indicating the range of interest rates and maturity dates); and (b) fully collateralized repurchase agreements (indicate in a footnote the range of dates of the repurchase agreements, the total purchase price of the securities, the total amount to be received upon repurchase, the range of repurchase dates, and description of securities subject to the repurchase agreements). Restricted and unrestricted securities of the same issue should be aggregated for purposes of determining whether the issue is among the 50 largest issues, but should not be combined in the schedule. For purposes of determining whether the value of an issue exceeds one percent of net asset value, aggregate and treat as a single issue all securities of any one issuer, except that all fully collateralized repurchase agreements shall be aggregated and treated as a single issue. The U.S. Treasury and each agency, instrumentality, or corporation, including each government-sponsored entity, that issues U.S. government securities is a separate issuer.\" 5\t\"For options purchased, all information required by §210.12-13 for options contracts written should be shown. Options on underlying investments where the underlying investment would otherwise be presented in accordance with §§210.12-12, 12-13A, 12-13B, 12-13C, or 12-13D should include the description of the underlying investment as would be required by §§210.12-12, 12-13A, 12-13B, 12-13C, or 12-13D as part of the description of the option.\" 6\t\"If multiple securities of an issuer aggregate to greater than one percent of net asset value, list each issue of the issuer separately (including separate listing of restricted and unrestricted securities of the same issue) except that the following may be aggregated and listed as a single issue: (a) Fixed-income securities of the same issuer which are not among the 50 largest issues and whose value does not exceed one percent of net asset value of the registrant as of the close of the period (indicating the range of interest rates and maturity dates); and (b) U.S. government securities of a single agency, instrumentality, or corporation, which are not among the 50 largest issues and whose value does not exceed one percent of net asset value of the registrant as of the close of the period (indicating the range of interest rates and maturity dates). For each category identified pursuant to note 1, group all issues that are neither separately listed nor included in a group of securities that is listed in the aggregate as a single issue in a sub-category labeled “Other securities,” and provide the information for Columns C and D.\" 7\t\"Any securities that would be required to be listed separately or included in a group of securities that is listed in the aggregate as a single issue may be listed in one amount as “Miscellaneous securities,” provided the securities so listed are eligible to be, and are, categorized as “Miscellaneous securities” in the registrant's Schedule of Investments in Securities of Unaffiliated Issuers required under §210.12-12. However, if any security that is included in “Miscellaneous securities” would otherwise be required to be included in a group of securities that is listed in the aggregate as a single issue, the remaining securities of that group must nonetheless be listed as required by notes 4 and 5 even if the remaining securities alone would not otherwise be required to be listed in this manner (e.g., because the combined value of the security listed in “Miscellaneous securities” and the remaining securities of the same issuer exceeds one percent of net asset value, but the value of the remaining securities alone does not exceed one percent of net asset value).\" 8\t\"If any securities are listed as “Miscellaneous securities” pursuant to note 6 or “Other securities” pursuant to note 5, briefly explain in a footnote what those terms represent.\" 9\tTotal Column C. The total of Column C should equal the total shown on the related balance sheet for investments in securities of unaffiliated issuers. 10\t\"Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest payment date or date for the declaration of dividends prior to the date of the related balance sheet, there was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the effect that, on the last interest or dividend date, only partial interest was paid or partial dividends declared. If, on such respective last interest or dividend date, no interest was paid or no cash or in kind dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to be income producing unless, during the last year preceding the date of the related balance sheet, there was at least one dividend paid upon such common shares.\" 11\t\"Indicate by an appropriate symbol each issue of restricted securities. State the following in a footnote: (a) As to each such issue: (1) Acquisition date, (2) carrying value per unit of investment at date of related balance sheet, e.g., a percentage of current market value of unrestricted securities of the same issuer, etc., and (3) the cost of such securities; (b) as to each issue acquired during the year preceding the date of the related balance sheet, the carrying value per unit of investment of unrestricted securities of the same issuer at: (1) The day the purchase price was agreed to; and (2) the day on which an enforceable right to acquire such securities was obtained; and (c) the aggregate value of all restricted securities and the percentage which the aggregate value bears to net assets.\" 12\tIndicate by an appropriate symbol each issue of securities whose value was determined using significant unobservable inputs. 13\t\"Indicate by an appropriate symbol each issue of securities held in connection with open put or call option contracts, loans for short sales, or where any portion of the issue is on loan.\"
[81 FR 82015, Nov. 18, 2016] The following is the text of Regulation S-X Rule 12-12C (17 CFR 210.12-12C).
The following is the text of Regulation S-X Rule 12-13, Open Option Contracts Written (17 CFR 210.12-13).
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Reg. § 210.12.13 Open Option Contracts Written [For management investment companies only] Column A Column B Column C\tColumn D\tColumn E\tColumn F\tColumn G \"Description1,2,3\" Counterparty4\tNumber of contracts5\tNotional amount\tExercise price\tExpiration date\t\"Value6,7,8\" 1\tInformation as to put options shall be shown separately from information as to call options. 2\t\"Options where descriptions, counterparties, exercise prices or expiration dates differ shall be listed separately.\" 3\t\"Options on underlying investments where the underlying investment would otherwise be presented in accordance with §§210.12-12, 12-13A, 12-13B, 12-13C, or 12-13D should include the description of the underlying investment as would be required by §§210.12-12, 12-13A, 12-13B, 12-13C, or 12-13D as part of the description of the option. \" \"If the underlying investment is an index or basket of investments, and the components are publicly available on a Web site as of the balance sheet date, identify the index or basket. If the underlying investment is an index or basket of investments, the components are not publicly available on a Web site as of the balance sheet date, and the notional amount of the option contract does not exceed one percent of the net asset value of the registrant as of the close of the period, identify the index or basket. If the underlying investment is an index or basket of investments, the components are not publicly available on a Web site as of the balance sheet date, and the notional amount of the option contract exceeds one percent of the net asset value of the registrant as of the close of the period, provide a description of the index or custom basket and list separately: (i) The 50 largest components in the index or custom basket and (ii) any other components where the notional value for that components exceeds 1% of the notional value of the index or custom basket. For each investment separately listed, include the description of the underlying investment as would be required by §§210.12-12, 12-13, 12-13A, 12-13B, or 12-13D as part of the description, the quantity held (e.g. the number of shares for common stocks, principal amount for fixed income securities), the value at the close of the period, and the percentage value when compared to the custom basket's net assets.\" 4\tNot required for exchange traded or centrally cleared options. 5\t\"If the number of shares subject to option is substituted for number of contracts, the column name shall reflect that change.\" 6\tIndicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment. 7\tIndicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs. 8\tColumn G shall be totaled and shall agree with the correlative amount shown on the related balance sheet.
[81 FR 82016, Nov. 18, 2016] The following is the text of Regulation S-X Rule 12-13A, Open Futures Contracts (17 CFR 210.12-13A).
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Reg. § 210.12-13A Open Futures Contracts [For management investment companies only] Column A Column B Column C Column D Column E Column F \"Description1,2,3,4,5\" Number of contracts\tExpiration date\tNotional amount6\tValue\tUnrealized appreciation/ depreciation 1\t\"Information as to long purchases of futures contracts shall be shown separately from information as to futures contracts sold short.\" 2\tFutures contracts where descriptions or expiration dates differ shall be listed separately. 3\tDescription should include the name of the reference asset or index. 4\t\"Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment.\" 5\tIndicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs. 6\tNotional amount shall be the current notional amount at close of period.
[81 FR 82017, Nov. 18, 2016] The following is the text of Regulation S-X Rule 12-13B, Open Forward Foreign Currency Contracts (17 CFR 210.12-13B).
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Reg. § 210.12-13B Open Forward Foreign Currency Contracts [For management investment companies only] Column A Column B Column C Column D Column E Amount and description of currency to be purchased1 Amount and description of currency to be sold1\tCounterparty\tSettlement date\t\"Unrealized appreciation/ depreciation2,3,4\" 1\t\"Forward foreign currency contracts where description of currency purchased, description of currency sold, counterparty, or settlement dates differ shall be listed separately.\" 2\t\"Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment.\" 3\t\"Indicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs.\" 4\t\"Column E shall be totaled and shall agree with the total of correlative amount(s) shown on the related balance sheet.\"
[81 FR 82017, Nov. 18, 2016] The following is the text of Regulation S-X Rule 12-13C, Open Swap Contracts (17 CFR 210.12-13C).
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Reg. § 210.12-13C Open Swap Contracts [For management investment companies only] Column A Column B Column C Column D Column E\tColumn F\tColumn G\tColumn H \"Description and terms of payments to be received from another party1,2,3\" \"Description and terms of payments to be paid to another party1,2,3\"\tCounterparty4\tMaturity date\tNotional amount\tValue\t\"Upfront payments/ receipts\"\t\"Unrealized appreciation/ depreciation5,6,7\" 1\t\"List each major category of swaps by descriptive title (e.g., credit default swaps, interest rate swaps, total return swaps). Credit default swaps where protection is sold shall be listed separately from credit default swaps where protection is purchased.\" 2\t\"Swaps where description, counterparty, or maturity dates differ shall be listed separately within each major category.\" 3\t\"Description should include information sufficient for a user of financial information to understand the terms of payments to be received and paid. (e.g. For a credit default swap, including, among other things, description of reference obligation(s) or index, financing rate to be paid or received, and payment frequency. For an interest rate swap, this may include, among other things, whether floating rate is paid or received, fixed interest rate, floating interest rate, and payment frequency. For a total return swap, this may include, among other things, description of reference asset(s) or index, financing rate, and payment frequency.) If the reference instrument is an index or basket of investments, and the components are publicly available on a Web site as of the balance sheet date, identify the index or basket. If the reference instrument is an index or basket of investments, the components are not publicly available on a Web site as of the balance sheet date, and the notional amount of the swap contract does not exceed one percent of the net asset value of the registrant as of the close of the period, identify the index or basket. If the reference instrument is an index or basket of investments, the components are not publicly available on a Web site as of the balance sheet date, and the notional amount of the swap contract exceeds one percent of the net asset value of the registrant as of the close of the period provide a description of the index or custom basket and list separately: (i) The 50 largest components in the index or custom basket and (ii) any other components where the notional value for that components exceeds 1% of the notional value of the index or custom basket. For each investment separately listed, include the description of the underlying investment as would be required by §§210.12-12, 210.12-13, 210.12-13A, 210.12-13B, or 210.12-13D as part of the description, the quantity held (e.g., the number of shares for common stocks, principal amount for fixed income securities), the value at the close of the period, and the percentage value when compared to the custom basket's net assets.\" 4\tNot required for exchange-traded or centrally cleared swaps. 5\tIndicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment. 6\tIndicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs. 7\tColumns G and H shall be totaled and shall agree with the total of correlative amount(s) shown on the related balance sheet.
[81 FR 82017, Nov. 18, 2016] The following is the text of Regulation S-X Rule 12-13D, Investments Other Than Those Presented in §§210.12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B, and 12-13C (17 CFR 210.12-13D).
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\"Reg. § 210.12-13D Investments Other Than Those Presented in §§210.12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B, and 12-13C\" [For management investment companies only] Column A Column B Column C \"Description1,2,3\" \"Balance held at close of period—quantity4,5\"\t\"Value of each item at close of period6,7,8,9\" 1\tEach investment where any portion of the description differs shall be listed separately. 2\t\"Categorize the schedule by (i) the type of investment (such as real estate, commodities, and so forth); and, as applicable, (ii) the related industry, country, or geographic region of the investment.\" 3\t\"Description should include information sufficient for a user of financial information to understand the nature and terms of the investment, which may include, among other things, reference security, asset or index, currency, geographic location, payment terms, payment rates, call or put feature, exercise price, expiration date, and counterparty for non-exchange-traded investments.\" 4\t\"If practicable, indicate the quantity or measure in appropriate units.\" 5\tIndicate by an appropriate symbol each investment which is non-income producing. 6\tIndicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment. 7\tIndicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs. 8\t\"Indicate by an appropriate symbol investment subject to option. State in a footnote: (a) The quantity subject to option, (b) nature of option contract, (c) option price, and (d) dates within which options may be exercised.\" 9\tColumn C shall be totaled and shall agree with the correlative amount shown on the related balance sheet.
[81 FR 82018, Nov. 18, 2016] The following is the text of Regulation S-X Rule 12-14, Investments in and Advances to Affiliates (17 CFR 210.12-14).
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Reg. § 210.12-14 Investments in and Advances to Affiliates [For management investment companies only] Column A Column B Column C Column D\tColumn E Column F \"Name of issuer and title of issue or nature of indebtedness1,2,3\" \"Number of shares—principal amount of bonds, notes and other indebtedness held at close of period\"\t\"Net realized gain or loss for the period4,6 \"\t\"Net increase or decrease in unrealized appreciation or depreciation for the period4,6\"\t\"Amount of dividends or interest4,6\" \"Value of each item at close of period5,7,8,9\" \"(Col. 1) Credit to income\"\t\"(Col. 2) Other\" 1\t\"(a) List each issue separately and group (1) investments in majority-owned subsidiaries; (2) other controlled companies; and (3) other affiliates. (b) If during the period there has been any increase or decrease in the amount of investment in and advance to any affiliate, state in a footnote (or if there have been changes to numerous affiliates, in a supplementary schedule) (1) name of each issuer and title of issue or nature of indebtedness; (2) balance at beginning of period; (3) gross additions; (4) gross reductions; (5) balance at close of period as shown in Column F. Include in the footnote or schedule comparable information as to affiliates in which there was an investment at any time during the period even though there was no investment at the close of the period of report. \" 2\tCategorize the schedule as required by instruction 2 of §210.12-12. 3\t\"Indicate the interest rate or preferential dividend rate and maturity date, as applicable, for preferred stocks, convertible securities, fixed income securities, government securities, loan participations and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities, repurchase agreements, or other instruments with a stated rate of income. For variable rate securities, indicate a description of the reference rate and spread and: (1) The end of period interest rate or (2) disclose the end of period reference rate for each reference rate described in the Schedule in a note to the Schedule. For securities with payment in kind income, disclose the rate paid in kind. \" 4\t\"Columns C, D, E, and F shall be totaled. The totals of Column F shall agree with the correlative amount shown on the related balance sheet.\" 5\t\"(a) Indicate by an appropriate symbol each issue of restricted securities. The information required by instruction 8 of §210.12-12 shall be given in a footnote. (b) Indicate by an appropriate symbol each issue of securities subject to option. The information required by §210.12-13 shall be given in a footnote. \" 6\t\"(a) Include in Column E (1) as to each issue held at the close of the period, the dividends or interest included in caption 1 of the statement of operations. In addition, show as the final item in Column E (1) the aggregate of dividends and interest included in the statement of operations in respect of investments in affiliates not held at the close of the period. The total of this column shall agree with the correlative amount shown on the related statement of operations. (b) Include in Column E (2) all other dividends and interest. Explain in an appropriate footnote the treatment accorded each item. (c) Indicate by an appropriate symbol all non-cash dividends and interest and explain the circumstances in a footnote. (d) Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest payment date or date for the declaration of dividends prior to the date of the related balance sheet, there was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the effect that, on the last interest or dividend date, only partial interest was paid or partial dividends declared. If, on such respective last interest or dividend date, no interest was paid or no cash or in kind dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to be income producing unless, during the last year preceding the date of the related balance sheet, there was at least one dividend paid upon such common shares. (e) Include in Column C (1) as to each issue held at the close of the period, the realized gain or loss included in §210.6-07.7 of the statement of operations. In addition, show as the final item in Column C (1) the aggregate of realized gain or loss included in the statement of operations in respect of investments in affiliates not held at the close of the period. The total of this column shall agree with the correlative amount shown on the related statement of operations. (f) Include in Column D (1) as to each issue held at the close of the period, the net increase or decrease in unrealized appreciation or depreciation included in §210.6-07.7 of the statement of operations. In addition, show as the final item in Column D (1) the aggregate of increase or decrease in unrealized appreciation or depreciation included in the statement of operations in respect of investments in affiliates not held at the close of the period. The total of this column shall agree with the correlative amount shown on the related statement of operations.\" 7\t\"The subtotals for each category of investments, subdivided both by type of investment and industry, country, or geographic region, shall be shown together with their percentage value compared to net assets.\" 8\tIndicate by an appropriate symbol each issue of securities whose value was determined using significant unobservable inputs. 9\t\"Indicate by an appropriate symbol each issue of securities held in connection with open put or call option contracts, loans for short sales, or where any portion of the issue is on loan.\"
[81 FR 82018, Nov. 18, 2016] The following is the text of Regulation S-X Rule 12-15, Summary of Investments—Other than Investments in Related Parties (17 CFR 210.12-15).
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Reg. § 210.12-15 Summary of Investments-Other than Investments in Related Parties [For insurance companies] Column A Column B Column C Column D Type of investment Cost1 Value Amount at which shown in the balance sheet2 Fixed maturities: Bonds: United States Government and government government agencies and authorities \"States, municipalities and political subdivisions\" Foreign governments Public utilities Convertibles and bonds with warrants attached3 All other corporate bonds Certificates of Deposit Redeemable preferred stock Total fixed maturities Equity securities: Common stocks Public utilities \"Banks, trust and insurance companies\" \"Industrial, miscellaneous and all other\" Nonredeemable preferred stocks Total equity securities Mortgage loans on real estate Real estate 4 Policy loans Other long-term investments Short-term investments Total investments 1\t\"Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts.\" 2\t\"If the amount at which shown in the balance sheet is different from the amount shown in either column B or C, state the reason for such difference. The total of this column should agree with the balance sheet.\" 3\t\"All convertibles and bonds with warrants shall be included in this caption, regardless of issuer.\" 4\tState separately any real estate acquired in satisfaction of debt.
[46 FR 54337, Nov. 2, 1981] The following is the text of Regulation S-X Rule 12-21, Investments in Securities of Unaffiliated Issuers (17 CFR 210.12-21).
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Reg. § 210.12-21 Investments in Securities of Unaffiliated Issuers Column A Column B Column C Column D \"Name of issuer and title of issue1\" \"Balance held at close of period. Number of shares—principal amount of bonds and notes2\"\t\"Cost of each item3,4\"\t\"Value of each item at close of period3,5\" 1\t\"(a) The required information is to be given as to all securities held as of the close of the period of report. Each issue shall be listed separately. \" \"(b) Indicate by an appropriate symbol those securities which are non-income-producing securities. Evidences of indebtedness and preferred shares may be deemed to be income-producing if, on the respective last interest payment date or dates for the declaration of dividends prior to the date of the related balance sheet, there was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the effect that, on the last interest or dividend date, only partial interest was paid or partial dividends declared. If, on such respective last interest or dividend date, no interest was paid or no dividends declared, the issue shall not be deemed to be income-producing. Common shares shall not be deemed to be income-producing unless, during the last year preceding the date of the related balance sheet, there was at least one dividend paid upon such common shares. List separately (1) bonds; (2) preferred shares; (3) common shares. Within each of these subdivisions classify according to type of business, insofar as practicable: e.g., investment companies, companies, railroads, utilities, banks, insurance companies, or industrials. Give totals for each group, subdivision, and class.\" 2\t\"Indicate any securities subject to option at the end of the most recent period and state in a note the amount subject to option, the option prices, and the dates within which such options may be exercised.\" 3\tColumns C and D shall be totaled. The totals of columns C and D should agree with the correlative amounts required to be shown by the related balance sheet captions. State in a footnote to column C the aggregate cost for Federal income tax purposes. 4\t\"If any investments have been written down or reserved against by such companies pursuant to § 210.6-03(d), indicate each such item by means of an appropriate symbol and explain in a footnote.\" 5\t\"Where value is determined on any other basis than closing prices reported on any national securities exchange, explain such other basis in a footnote.\"
[47 FR 56844, Dec. 21, 1982, as amended at 83 FR 50208, Oct. 4, 2018] The following is the text of Regulation S-X Rule 12-22, Investments in and Advances to Affiliates and Income Thereon (17 CFR 210.12-22).
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Reg. § 210.12-22 Investment in and Advances to Affiliates and Income Thereon Column A Column B Column C Column D Column E Column F \"Name of issuer and title of issue or amount of indebtedness 1\" \"Balance held at close of period—Number of shares—principal amount of bonds, notes and other indebtedness 2 \"\t\"Cost of each item 3,4\"\t\"Amount at which carried at close of period 4,5 \"\t\"Amount of dividends or interest 4,6 \" \"Amount of equity in net profit and loss for the period 7\" (1)\t(2) Credited to income\tOther 1\t\"(a) The required information is to be given as to all investments in affiliates as of the close of the period. See §§210.6-06(1), 210.6-06(5)(b), 210.6-06(8)(a)(2), and 210.6-06(8)(a)(3). List each issue and group separately (1) investments in majority-owned subsidiaries, segregating subsidiaries consolidated; (2) other controlled companies; and (3) other affiliates. Give totals for each group. If operations of any controlled companies are different in character from those of the registrant, group such affiliates within divisions (1) and (2) by type of activities. (b) Changes during the period. If during the period there has been any increase or decrease in the amount of investment in any affiliate, state in a footnote (or if there have been changes as to numerous affiliates, in a supplementary schedule) (1) name of each issuer and title of issue; (2) balance at beginning of period; (3) gross purchases and additions; (4) gross sales and reductions; (5) balance at close of period as shown in column C. Include in such footnote or schedule comparable information as to affiliates in which there was an investment at any time during the period even though there was no investment in such affiliate as of the close of such period.\" 2\t\"Indicate any securities subject to option at the end of the most recent period and state in a footnote the amount subject to option, the option prices, and the dates within which such options may be exercised.\" 3\t\"If the cost in column C represents other than cash expenditure, explain.\" 4\t\"(a) Columns C, D and E shall be totaled. The totals of columns C and D should agree with correlative amounts required to be shown by the related balance sheet captions. State in a footnote the aggregate cost for Federal income tax purposes. (b) If any investments have been written down or reserved against by such companies pursuant to § 210.6-03(d), indicate each such item by means of an appropriate symbol and explain in a footnote. \" 5\tState the basis of determining the amounts shown in Column D. 6\t\"Show in column E(1) as to each issue held at close of period, the dividends or interest included in caption 1 of the profit and loss or income statement. In addition, show as the final item in column E(1) the aggregate dividends and interest included in the profit and loss or income statement in respect of investments in affiliates not held at the close of the period. The total of this column should agree with the amounts shown under such caption. Include in column E(2) all other dividends and interest. Explain briefly in an appropriate footnote the treatment accorded each item. Identify by an appropriate symbol all non-cash dividends and explain the circumstances in a footnote. See §§ 210.6-06(3)(a)(2), 210.6-03(g), and 210.6-07(1.\" 7\t\"The information required by column F need by furnished only as to controlled companies. The equity in the net profit and loss of each person required to be listed separately shall be computed on an individual basis. In addition, there may be submitted the information required as computed on the basis of the statements of each such person and its subsidiaries consolidated.\"
[59 FR 65637, Dec. 20, 1994, as amended at 83 FR 50208, Oct. 4, 2018] The following is the text of CFRR 404.02, Accounting for Interest Collected on Defaulted Bonds.
ASR 36:
A question has been raised as to the treatment by an investment company of interest collected on defaulted bonds applicable to a period prior to the date on which such bonds and defaulted interest were acquired. In the particular case an investment company purchased, at a \"flat\" price of $260,000, $1,000,000 principal amount of bonds with attached defaulted interest coupons amounting to $250,000. The company subsequent to the purchase received an interest payment of $40,000 on account of defaulted interest coupons for periods to the purchase.
Where a purchase is made of defaulted bonds with defaulted interest coupons attached, it is clear that the purchase price covers not only the right to receive the principal of the bond itself, but also the right the receive any payments made on the defaulted interest coupons purchased. Under these circumstances, the price paid cannot be deemed to reflect only the cost of acquisition of the issuer's obligation to pay the principal sum, but must instead be considered to reflect as well the cost of acquisition of the issuer's existing obligation to pay the interest coupons already matured. In the usual case, moreover, there is no satisfactory basis on which to allocate the total price between the bond on the one hand and the defaulted interest coupons on the other. Under such circumstances, the bond and defaulted coupons should be treated as a unit for accounting purposes and collects on account of the defaulted interest coupons should be treated not as interest on the sum invested but rather as repayments thereof. Moreover, in view of the uncertainty of eventually receiving payments in excess of the purchase price, ordinarily no part of any payment, whether on account of principal or the defaulted interest, should be considered as profit until the full purchase price has been recovered.
In the instant case, therefore, the receipt of the $40,000 interest payments should be treated as a reduction of the cost of the investment and not as interest income, or as a profit on the investment. After payments are received on account of the principal and defaulted interest in an amount equal to the purchase price, any further collections thereon should be treated not as interest, but as profit on securities purchased. On the other hand, it seems clear that collection of interest coupons covering periods subsequent to the purchase may be treated as interest income unless the circumstances of a particular case are such as to indicate that, despite the apparent nature of the payment, recovery of the cost of the investment through sale or redemption is so uncertain as to make it necessary to treat the payment as a reduction of the investment.
The following is the text of CFRR 404.03 Accounting, Valuation and Disclosure of Investment Securities.
[The Commission has periodically published its views as to the appropriate method of accounting for and valuation of investment securities of registered investment companies. In addition, the Commission's views have also been published regarding the appropriate disclosure of certain types of investment securities.]
The following is the text of CFRR 404.03.a. General.
ASR 118:
The statement of assets and liabilities of a registered investment company comprises, for the most part, not only investments in securities which are held by a custodian or are on hand, but also frequently includes securities as to which contracts to purchase have been entered into but which have not been received. Securities held by a custodian or on hand that have been contracted to be sold are excluded from the investments in such statement. In the ordinary transaction through a broker, recording the transaction on the date the broker advised the investment company that the securities have been purchased or sold (the \"trade date\"), rather than when delivery is made or due (the \"settlement date\"), is the established and acceptable practice in investment company accounting.
In the case of purchased or sales of securities other than in the usual brokerage transactions, the date on which the investment company obtains an enforceable right to demand the securities or the payment therefor the date the transaction should be recorded is sometimes difficult to determine. When a question arises as to the date an enforceable right is obtained by the investment company, an opinion of legal consent as to when the right occurred should normally be obtained by the company's management and made available to the independent accountant. Such an opinion should be in writing, and a copy should be included in the accountant's working papers.
Where the propriety or validity of an investment in a security by an investment company is questionable because of particular provisions or the Investment Company Act, or state law, or the company's investment policy or other representations as stated in its filings with the Commission, or legal obligations in respect of a contract or transaction, a written opinion of legal counsel should also be obtained by the company's management, made available to the independent accountant, and a copy included in the working papers. If the questions of propriety or validity are not satisfactorily resolved, the circumstances of the investment should be disclosed in the financial statements or notes thereto.
Securities held by the company or its custodian should be substantiated by the company's independent accountant in the course of an audit by inspection of such securities in custody pursuant to Section 17(f) of the Investment Company Act. When securities contracted to be purchased but not yet received are included in the statement of assets and liabilities, confirmation of the contract to purchase should be obtained from the bank, broker, or other person responsible for the delivery of such securities. Where satisfactory confirmation has been received, audit procedures normally need not be extended to obtain evidence of subsequent receipt of the securities by the company or its custodian unless additional substantiation is considered necessary by the independent accountant under the circumstances. Where satisfactory confirmation has not been received, subsequent receipt of such securities should be substantiated by other appropriate procedures.
In accordance with Section 30(e) of the Investment Company Act, the certificate of the company's independent accountant should include a brief statement concerning the substantiation of securities owned. Except for securities contracted to be purchased but not received, the certificate should state that the securities were either inspected by the independent accountant or, where the company's securities were maintained in custody pursuant to Section 17(f) of the Investment Company Act, were confirmed to him by the custodian. In the case of securities contracted to be purchased but not received by the company or its custodian, reference should be made to confirmation by banks, brokers, or others or to alternative procedures, as appropriate in the circumstances.
The following is the text of CFRR 404.03.b. Valuation of Securities.
i. Introduction
ASR 118:
Under Article 6 of Regulation S-X, the statement of assets and liabilities of open-end investment companies must reflect all assets at value, showing cost parenthetically, while closed-end companies may elect to use either this basis or to reflect all assets at cost, showing value parenthetically.
\"Value\" is defined in Section 2(a)(41) of the Investment Company Act. For purposed of determining the amounts at which securities and other assets are carried in the statements of assets and liabilities included in annual and other reports and in registration statements filed by investment companies, \"value\" is defined in pertinent part as: \"(I) with respect to securities for which market quotations are readily available, the market value of such securities; and (ii) with respect to other securities and assets, fair value as determined in good faith by the board of directors....\" This definition is also used in Rule 2a-4 under the Investment Company Act as the required basis for computing periodically the current net asset value of redeemable securities of investment companies for the purpose of pricing their shares.
In some circumstances value can be determined fairly in more than one way. Hence, the standards set forth below should be considered as guidelines, one or more of which may be appropriate in the circumstances of a particular case. These standards should be followed, and a company's stated valuation policies should be consistent with them. Any variation from the standards should be disclosed in the financial statements or notes thereto even though the variation is in accordance with the company's stated valuation policy. In addition, any deviation from a stated valuation policy, whether or not in conformity with the standard, should be disclosed in the financial statements or notes thereto.
ii. Securities Listed or Traded on a National Securities Exchange
ASR 118:
Ordinarily, little difficulty should be experienced in valuing securities listed or traded on one or more national securities exchanges, since quotations of completed transaction are published daily. If a security is traded on the valuation date, the last quoted sale price generally is used. In the case of securities listed on more than one national securities exchange the last quoted sale, up to the time of valuation, on the exchange on which the security is principally traded should be used or, if there were no sales on that exchange on the valuation date, the last quoted sale, up to the time of valuation, on the other exchanges should be used. With respect to the time of valuation, Rule 22c-1 under the Investment Company Act specifies the frequency with which current net asset value shall be computed.
If there was no sale on the valuation date but published closing bid and asked prices are available, the valuation in such circumstances should be within the range of these quoted prices. Some companies as a matter of general policy use the bid price, others use the mean of the bid and asked prices, and still others use a valuation within the range considered best to represent values in the circumstances; each of these policies is acceptable if consistently applied. Normally, it is not acceptable to use the asked price alone. Where, on the valuation date, only a bid price or an asked price is quoted or the spread between bid and asked prices is substantial, quotations for several days should be reviewed. If sales have been infrequent or there is a thin market in the security, further consideration should be given to whether \"market quotations are readily available.\" If it is decided that they are not readily available, the alternative method of valuation prescribed by Section 2(a)(41) \"fair value as determined in good faith by the board of directors\" should be used.
iii. Over-the-Counter Securities
ASR 118:
Quotations are available from various sources for most unlisted securities traded regularly in the over-the-counter market. These sources include tabulations in the financial press, publications of the National Quotation Bureau and the \"Blue List\" of municipal bond offerings, several financial reporting services, and individual broker-dealers. These quotations generally are in the form of inter-dealer bid and asked prices. Because of the availability of multiple sources, a company frequently has a greater number of options open to it in valuing securities traded in the over-the-counter market than it does in valuing listed securities. A company may adopt a policy of using a mean of the bid prices, or of the bid and asked prices or of the prices of a representative selection of broker-dealers quoting on a particular security; or it may use a valuation within the range of bid and asked prices considered best to represent value in the circumstances. Any of these policies is acceptable if consistently applies. Normally, the use of asked prices alone is not acceptable.
Ordinarily, quotations for a security should be obtained from more than one broker-dealer, particularly if quotations are available only from broker-dealers not known to be established market-makers for that security, and quotations for several days should be reviewed. If the validity of the quotations appears to be questionable, or if the number of quotations is such as to indicate that there is a thin market in the security, further considerations should be given to whether \"market quotations are readily available.\" If it is decided that they are not readily available, the security should be considered one required to be valued at \"fair value as determined in good faith by the board of directors.\"
iv. Securities Value \"in Good Faith\"
ASR 118:
To comply with Section 2(a)(41) of the Investment Company Act and Rule 2a-4 under the Investment Company Act, it is incumbent upon the board of directors to satisfy themselves that all appropriate factors relevant to the value of securities for which market quotations are not readily available have been considered and to determine the method of arriving at the fair value of each such security. To the extent considered necessary, the board may appoint persons to assist them in the determination of such value, and to make the actual calculations pursuant to the board's direction. The board must also, consistent with this responsibility, continuously review the appropriateness of the method used in valuing each issue of security in the company's portfolio. The directors must recognize their responsibilities in this matter and whenever technical assistance is requested from individuals who are not directors, the findings of such individuals must be carefully reviewed by the directors in order to satisfy themselves that the resulting valuations are fair.
No single standard for determining \"fair value... in good faith\" can be laid down, since fair value depends upon the circumstances of each individual case. As a general principle, the current \"fair value\" of an issue of securities being valued by the board of directors would appear to be the amount which the owner might reasonably expect to receive for them upon their current sale. Methods which are in accord with this principle may, for example, be based on a multiple of earnings, or a discount from market of a similar freely traded security, or yield to maturity with respect to debt issues, or a combination of these and other methods. Some of the general factors which the directors should consider in determining a valuation method for an individual issue of securities include: 1) the fundamental analytical data relating to the investment, 2) the nature and duration of restrictions on disposition of the securities, and 3) an evaluation of the forces which influence the market in which these securities are purchased and sold. Among the more specific factors, which are to be considered are: type of security, financial statements, cost at date of purchase, size of holding, discount from market value of unrestricted securities of the same class at time of purchase, special reports prepared by analysts, information as to any transactions or offers with respect to the security, existence of merger proposals or tender offers affecting the security, price and extent of public trading in similar securities of the issuer or comparable companies, and other relevant matters.
The above guidance does not purport to delineate all factors which may be considered. The directors should take into consideration all indications of value available to them in determining the \"fair value\" assigned to a particular security. The information so considered together with, to the extent practicable, judgment factors considered by the board of directors in reach its decisions should be documented in the minutes of the director's meetings and the supporting data retained for the inspection of the company's independent accountant.
The following is the text of CFRR 404.03.c. Auditing Security Valuations.
ASR 118:
In the case of securities for which market quotations are readily available, the independent accounts should independently verify all the quotations used by the company at the balance sheet date and satisfy himself that such quotations may properly be used under the standards stated above.
In the case of securities carried at \"fair value\" as determined by the board of directors in \"good faith,\" the accountant does not function as an appraiser and is not expected to substitute his judgment for that of the company's directors; rather, he should review all information considered by the board or by analysts reporting to it, read relevant minutes of directors meetings, and ascertain the procedures followed by the directors. If the accountant is unable to express an unqualified opinion because of the uncertainty inherent in the valuations of the securities based on the directors' subjective judgment, he should nevertheless make appropriate mention in his certificate whether in the circumstances the procedures appear to be reasonable and the underlying documentation appropriate.
When considering values assigned to securities by the company, the independent accountant should consider any investment limitations or conditions on the acquisition or holding of such securities which may be imposed on the company by the Act, by its certificate or by-laws, by contract, or by its filings with the Commission. If such restrictions are met by a narrow margin, the independent accountant may need to exercise extra care in satisfying himself that the evidence indicates that the security valuation determinations were not biased to meet those restrictions.
The following is the text of CFRR 404.03.d. Investments in Affiliates or Affiliated Persons.
ASR 118.
Various rules of Regulation S-X require that the financial statements of an investment company state separately investments in, investment income from, gain or loss on sales of securities of, and management or other service fees payable to (a) controlled companies and (b) other \"affiliates.\" As stated in Rule 6-02(d) of Regulation S-X, the term \"affiliate\" means and affiliated person as defined in Section 2(a)(3) of the Investment Company Act, and the term \"control\" has the meaning given in Section 2(a)(9) of the Investment Company Act in such a manner as to encompass such control relationships and also the direct or indirect ownership of five percent or more of the outstanding voting securities of any issuer. An affiliated person as there defined also includes any officer, director, partner, copartner, or employee or, with respect to an investment company, any investment adviser or member of an advisory board thereof.
In ascertaining the existence of any such affiliations, the independent accountant should consider the facts obtained during the course of an audit and also make inquiries of the company's management; and his working papers should include written representations from the management as evidence of such inquiries. The representations should be in the form of a statement that the company, except to the extent indicated, (i) does not own any securities either of persons who are directly affiliated, or, to the best information and belief of management, of person who are indirectly affiliated, (ii) has not received income from or realized gain or loss on sales of investments in or indebtedness of such persons, (iii) has not incurred expenses for management or other service fees payable to such persons, and (iv) has not otherwise engaged in transaction with such persons. Where there is a question as to the existence of an affiliation, a written opinion of legal counsel should be obtained b the company's management, made available to the independent accountant and a copy included in the working papers. Regulation S-X requires disclosure in the financial statements or notes thereto of details of such investments and transactions.
The following is the text of CFRR 404.04 \"Restricted\" Securities.
ASR 113:
Section 4(2) of the Securities Act exempts from the registration requirements of that Act \"transactions by an issuer not involving any public offering.\" This is the so-called \"private offering\" provision in the Securities Act. The securities involved in transactions effected pursuant to this exemption are referred to as restricted securities because they cannot be resold to the public without prior registration. They are also sometimes referred to as \"investment letter securities\" because of the practice frequently followed by the seller in such a transaction, in order to substantiate the claim that the transaction does not involve a public offering, of requiring that the buyer furnish a so-called \"investment letter\" representing that the purchase is for investment and not for resale to the general public.
The private offering exemption of Section 4(2) of the Securities Act is available only where the offerees do not need the protections afforded by the registration procedure. As the Court of Appeals for the Second Circuit stated in Katz v. Amos Treat & Co., CCH Fed'l. Sec. Law Rep. para. 92,409 (1969):
The Supreme Court has instructed that the applicability of the exemption should turn on whether the particular class of persons affected needs the protection of the Act. SEC V. Ralston Purina Co., 346 U.S. 119, 125 (1953).
The test of the availability of the Section 4(2) exemption is whether the offerees are in such a position with respect to the issuer as to have access to the kind of information that would be made available in a registration statement filed pursuant to the Securities Act. This test is no different when the offeree is an investment company.
The following is the text of CFRR 404.04.a. The Problem of Valuation.
ASR 113:
It is critically important that an investment company properly value its portfolio securities. It is obvious, for example, that any distortion in the valuation of a restricted security held by an investment company will distort the price at which the shares of the investment company are sold or redeemed. It is also clear that investment managers who are compensated on the basis of net asset value or performance my be unduly compensated if a restricted security, purchased at a discount from the market quotation for unrestricted securities of the same class, is over-valued. In such a case, investors may also be misled by the reported performance of the investment company.
The acquisition of restricted securities by both open-end and closed-end investment companies creates serious problems of valuation. Section 2(a)(41) of the Investment Company Act and Rule 2a-4 thereunder requires that in determining net asset value, \"securities for which market quotations are readily available\" must be valued at current market value while other securities and assets must be valued at \"fair value as determined in good faith by the board of directors.\"
Readily available market quotations refer to reports of current public quotations for securities similar in all respects to the securities in question. No such current public quotations can exist in the case of restricted securities. For valuation purposes, therefore, restricted securities constitute securities for which market quotations are not readily available. Accordingly, their fair values must be determined in good faith by the board of directors and this obligation necessarily continues throughout the period these securities are retained in the company's portfolio.
Restricted securities should be included in the portfolio of a company and valued to determine current net asset value on the date that the investment company has an enforceable right to demand the securities from the seller.
Where the investment company negotiates the acquisition of the restricted securities directly with the owner of the securities, there are three significant dates. The first occurs when the investment company and the seller orally agree upon the price and the amount of the securities (the \"handshake date\"). At this point, there would not seem to be any enforceable right of the investment company to demand the securities from the seller since, in most states, particularly those which have adopted the Uniform Commercial Code, there is no enforceable right unless there exists some writing \"sufficient to indicate that a contract has been made for sale of a stated quantity of described securities as a defined or stated price\" (Section 8-319(a) of the Uniform Commercial Code). If the terms of the oral understanding do not contemplate compliance with any condition by the seller, it is suggested that the investment company procure, from the seller, a signed memorandum setting forth the price and quantity of securities to be sold. Upon receipt of that memorandum and enforceable right would be obtained. The securities should be valued as of that date.
In those situations where the oral understanding contemplates the execution of a formal contract of purchase and sale, no enforceable right exists until the time the formal contract is signed (the \"contract date\"). If the formal contract does not require compliance with any conditions by the seller, an enforceable right is then obtained, and the securities should be valued as of that date.
Where the formal contract requires compliance with stated conditions which the investment company believes should not be waived, no enforceable right is obtained until the stated conditions are satisfied. In that situation, the valuation date should be the date upon which the conditions are satisfied. (the \"closing date\").
Restricted securities are often purchased at a discount, frequently substantial, from the market price of outstanding unrestricted securities of the same class. This reflects the fact that securities which cannot be readily sold in the public market place are less valuable than securities which can be sold, and also the fact that, by the direct sale of restricted securities, sellers avoid the expense, time and public disclosure which registration entails.
As a general principle, the current fair value of restricted securities would appear to be the amount which the owner might reasonably expect to receive for them upon their current sale. This depends upon their inherent worth, without regard to the restrictive feature, adjusted for any diminution in value resulting from the restrictive feature. Consequently, the valuation of restricted securities at the market quotations for unrestricted securities of the same class would, except for most unusual situations, be improper. Further, the continued valuation of such securities at cost would be improper if, as a result of the operation of the issuer, change in general market conditions or otherwise, cost has ceased; to represent fair market value. In such circumstances, maintaining the value of the restricted securities at cost would mislead investors as the value of the portfolio of the investment company which holds restricted securities.
Instead of valuing restricted securities at cost or at the market value of unrestricted securities of the same class, some investment companies valued restricted securities held in the portfolio by applying either a constant percentage or an absolute dollar discount to the market quotation for unrestricted securities of the same class. The automatic valuation of restricted securities by such a method, however, would also not appear to satisfy the requirement of the Investment Company Act that each security, for which a market quotation is not readily available, be valued at fair value as determined in good faith by the board of directors.
Thus, it would be improper in valuing restricted securities automatically to maintain the same percentage discount (from the market quotation for unrestricted securities of the same class) that was received when the restricted securities were purchased, without regard to other relevant factors such as, for example, the extent to which the inherent value of the securities may have changed.
Furthermore, the valuation of restricted securities by reference to the market price for unrestricted securities of the same class assumes that the market price for unrestricted securities of the same class is representative of the fair value of the securities. This may not be the case when the market for the unrestricted securities is very thin, i.e., only a limited volume of shares are available for trading. With a thin market, the news of the investment company's purchase of the restricted securities may, by itself, have the effect of stimulating a public demand for the unrestricted securities, the supply of which has not been increased, and thus lead to a spiralling increase in the valuation of both the restricted and unrestricted securities.
Moreover, if in valuing restricted securities, the diminution in value attributable to the restrictive feature is itself affected by factors subject to change, such as the length of time which must elapse before the investment company may require the issuers to cause the securities to be registered for public sale, the valuation should reflect any such changes.
Some companies value restricted securities, acquired at prices below the market quotations for unrestricted securities of the same class, by automatically amortizing the difference over some chosen period on the assumption that it will be possible to sell them at the market price for unrestricted securities at the expiration of the time period. Under prevailing conditions, however, it cannot always be determined either that the securities will, in fact, be effectively registered at the expiration of that period or that their public sale will otherwise be possible. For example, the issuer may be unable or unwilling to register at the expiration of the estimated period, and public sale at the end of that period without registration may not be lawful. Consequently, the practice of automatically amortizing the discount over an arbitrarily chosen period creates the appearance of an appreciation in the value of the securities which has not, in fact occurred, and, accordingly, is improper.
An undertaking by the issuer to register the securities within a specified time period would not dictate a different result. In view of the many factors that may alter the date of the proposed public offering, it is at best speculative to use such an undertaking alone as the basis for amortizing the discount.
In summary, there can be no automatic formula by which an investment company can value restricted securities in its portfolio to comply with Section 2(a)(41) and Rule 2a-4. It is the responsibility of the board of directors to determine the fair value of each issue of restricted securities in good faith; and the data and information considered and the analysis thereof should be retained for inspection by the company's independent auditors. While the board may, consistent with this responsibility, determine the method of valuing each issue of restricted security in the company's portfolio, it must continuously review the appropriateness of any method so determined. The actual calculations may be made by persons acting pursuant to the direction of the board.
The following is the text of CFRR 404.04.b. The Problem of Portfolio Management.
ASR 113:
In addition to valuation, restricted securities present special problems of portfolio management.
The concept of the Securities Act exemption of a private placement of securities is premised on the belief that in such a situation the investor has such information concerning the issuer that he is able to fend for himself without need for the disclosures that would be provided by an effective registration statement. Correlatively, where the investor is a registered investment company, it would seem to be the fiduciary duty of the persons responsible for the investment decisions of the investment company to obtain, prior to purchase, the necessary information to make an independent analysis of the investment merits of the particular restricted securities. Also, in order to enable the continuing valuation of such securities, the investment company should require the seller to undertake to provide, to the extent known to the seller, information on a continuing basis as to any subsequent private sales of the issuer's securities. The investment company should also assure itself that it is in the position to obtain the appropriate financial information at appropriate times. It is assumed that any public disclosures, such as that made in periodic reports filed pursuant to the Exchange Act, are carefully considered by the investment company portfolio manager.
There is also the paradox of too much success to consider. For example, if restricted securities rapidly appreciate in value, perhaps because of an improvement in the business of the issuer, an investment company may find instead of having, for example, 5 percent of its assets invested in a particular company, it has instead, 25 percent of its assets in that company. The investment company to which this happens suffers a loss in diversification and may find that it has become overly sensitive to any adverse developments in the affairs of that particular portfolio company.
The foregoing factors in portfolio management relate to both open-end and closed-end management companies. There are additional special factors that relate only to open-end companies.
Section 2(a)(32), when read together with Section 5(a), of the Investment Company Act requires that the holders of redeemable shares issued by an open-end investment company be entitled to receive approximately their proportionate share of the issuer's current net assets, or the cash equivalent thereof, upon presentation of the security to the issuer or to a person designated by the issuer. Section 22(e) of the Investment Company Act provide that, absent specified unusual conditions, payment of the redemption price must be made within seven days after the tender of a redeemable security to an investment company or its agent designated for that purpose.
It is desirable that an open-end company retains maximum flexibility in the choice of portfolio securities which, on the basis of their relative investment merits, could best be sold where necessary to meet redemptions. To the extent that the portfolio consists of restricted securities, this flexibility is reduced.
Restricted securities may not be publicly sold-nor can they be distributed to redeeming shareholders as an in-kind redemption. While they may be sold privately, there may not be sufficient time to obtain the best price since the date of payment or satisfaction may not be postponed more than seven days after the tender of the company's redeemable securities for redemption. A private sale within that period may result in the investment company receiving less that its carrying value of the restricted securities. This would result in a preference in favor of the redeeming shareholders and a diminution of the net asset value per share of shareholders who have not redeemed. Therefore, instead of arranging a private sale of restricted securities, an open-end company that is faced with redemptions may decide to sell unrestricted securities which it would otherwise have retained on the basis of comparative investment merit.
Significant holdings of restricted securities not only magnify the valuation difficulties but may also present serious liquidity questions. Because open-end companies hold themselves out at all times as being prepared to meet redemptions within seven days, it is essential that such companies maintain a portfolio of investments that enable them to fulfill that obligation. This requires a high degree of liquidity in the assets of open-end companies because the extent of the redemption demands or other exigencies are not always predictable. The Commission is of the view that a prudent limit on any open-end company's acquisition of restricted securities, or other assets not having readily available market quotations, would be 10 percent. When as a result of either the increase in the value of some or all of the restricted securities held, or the diminution in the value of unrestricted securities in the portfolios, the restricted securities come to represent a larger percentage of the value of the company's net assets, the same valuation and liquidity questions occur. Accordingly, if the fair value of restricted holdings increases beyond 10 percent, it would be desirable for the open-end company to consider appropriate steps to protect maximum flexibility. The Commission will re-examine appropriate limitations in this area in light of all the policy objectives of the Investment Company Act.
The following is the text of CFRR 404.04.c. The Problem of Disclosure.
ASR 113:
Section 8(b)(1)(D) of the Investment Company Act requires that an investment company include, in its registration statement filed with the Commission under the Investment Company Act, information as to its policy with respect to \"engaging in the business of underwriting securities issued by other persons.\" Item 5(b)(4) of Form N-1 and Item 7(b)(4) of Form N-2 require that a registrant under the Act describe its policy or proposed policy with respect to \"the underwriting of securities of other issuers.\" In response to this item, registrant's policy with respect to the acquisition of restricted securities should be disclosed. In view of the fact that policies listed under these items are fundamental policies which cannot be changed without prior shareholder approval, the importance of adopting a clear policy with regard to such investments is apparent.
The prospectus of a registered investment company should also fully disclose the company's policy with respect to restricted securities. It is also clear that an investment company which has a policy of acquiring restricted securities is responsible for full and adequate disclosure with respect to all matters relating to the valuation of such securities. Specifically, there should be included, in a note to the financial statements, (1) identification of any restricted securities and the date of acquisition, (2) disclosure of the methods used in valuing such securities both at the date of acquisition and the date of the financial statements, (3) disclosure of the cost of such securities and the market quotation for unrestricted securities of the same class both on the day the purchase price was agreed to (the so-called \"hand-shake date\"), and on the day the investment company first obtained and enforceable right to acquire such securities, and (4) a statement as to whether the issuer or the registrant will bear costs, including those involved in registration under the Securities Act, in connection with the disposition of such securities.
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder makes it unlawful, among other things, for any person, in connection with the purchase or sale of securities, to employ any device, scheme, or artifice to defraud or to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading, or engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any persons.
The offering price of securities issued by a management investment company is premised upon the net asset value of such shares as determined pursuant to Section 2(a)(41) of the Investment Company Act and Rule 2a-4 thereunder and is so represented in its prospectus. The improper valuation of restricted securities held by such a company would distort the net asset value of the shares being offered or, in the case of an open-end company, redeemed, and would therefore constitute a fraud and deceit within the meaning of Section 10(b) and Rule 10b-5.
An open-end company, of course, represents to investors, in its prospectus, that it will, as required by Section 22(e) of the Investment Company Act, redeem its securities at approximate net asset value within seven days after tender. To the extent a material percentage of the assets of an open-end company consists of restricted securities which cannot publicly be sold without registration under the Securities Act, the ability of the company to comply with the provisions of the Investment Company Act relating to redemption, and to fulfill the implicit representations made in its prospectus with respect thereto, may be adversely affected. In any such situation, the investment company concerned and the persons responsible for the sale of its securities should give careful consideration to the possible application of the provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
The following is the text of CFRR 404.05, Money Market Funds.
The following is the text of CFRR 404.05.a., Introduction.
ASR 219:
The Commission issued an interpretation of a rule adopted under the Investment Company Act indicating, generally, that it shall be considered inappropriate under the provisions of the rule for \"money market\" funds and certain other open-end investment companies to determine the fair value of debt portfolio securities on an amortized cost basis, except in the case of securities with remaining maturities of 60 days or less.
The Commission recognized that there had been considerable confusion and uncertainty as to the appropriate methods to be utilized by \"money market\" funds in valuing their portfolio securities. This interpretation should help remove the uncertainty and further the objectives of enabling investors in such funds to: (1) Purchase and redeem their shares at prices appropriately reflecting the current value of fund portfolio securities; (2) be properly credited for any unrealized appreciation or depreciation in such portfolio securities; and (3) be provided with meaningful and comparable information with which to appraise investment returns and the current earning ability of \"money market\" funds.
The following is the text of CFRR 404.05.b., Interpretation with Respect to Valuation of Debt Instruments by Money Market Funds and Certain Other Open-End Investment Companies.
FN*FN* In Investment Company Release 12206, February 1982, the Commission published for public comment proposed Rule 2a-7 under the Investment Company Act which would permit, under certain conditions, the use of the amortized cost method of asset valuation for purposes of calculating current net asset value per share or the \"penny-rounding\" method of computing current price per share. If adopted, the rule would generally supplement rather than supercede this interpretive guidance.
ASR 219:
The Commission is aware that many investment companies, including some \"money market\" funds, value short-term debt instruments in their portfolios on an amortized cost basis. Under this method of valuation, investment companies initially value such instruments at their cost on the date of purchase and, if the instrument was purchased at a discount, thereafter assume a constant proportional increase in value until maturity. FN1
FN1 In simplified terms, for instruments purchased at a discount, the difference between the cost of such an instrument at purchase and its maturity value is divided by the number of days to maturity and that amount is accrued daily as an increase in the value of the instrument each day. More precisely, amortized cost valuation may be described as cost, adjusted for amortization of premium, or for accretion of discount.
However, during the period a debt security is held, changes in the market rate of interest and other factors may affect the price at which that security could be sold. As a general principle, the longer the remaining maturity of an outstanding debt security, the more that price will be affected by such interest rate changes.
The Commission is concerned that the use of the amortized cost method in valuing portfolio securities of registered investment companies may result in overvaluation or undervaluation of the portfolios of such companies, relative to the value of the portfolios determined with reference to current market factors. In the case of registered open-end management investment companies (\"mutual funds\" or \"funds\"), this would mean investors purchasing or redeeming shares could pay or receive more or less than the actual value of their proportionate shares of the fund's current net assets. The effect of such sales or redemptions may therefore result in appropriate dilution of the assets and returns of existing shareholders. FN2
FN2 For example, redemptions of shares in a fund which has overvalued its portfolio or sales of shares in a fund which has undervalued its portfolio could result in the dilution of the assets and returns of other investors in the fund. The extent of such dilutive effects would be dependent upon several factors, including the extent of the overvaluation or undervaluation, and the proportion of fund shares sold or redeemed at such times.
Although inappropriate valuation of securities could cause these effects in various types of funds, the position taken herein is addressed specifically to the case of: (1) \"Money market\" funds, and (2) other open-end investment companies that hold a significant amount of debt securities, such that the use of the amortized cost method in valuing any portion or type of these debt securities could have a material impact on such funds' net asset values per share. Generally, the Commission would consider the use of a particular valuation method to have a material impact if the use of that method, as opposed to another method, might cause a change of at least one cent in a net asset value per share of $10.00. FN3 The interpretation explained below will be applicable to both \"money market\" funds and these other open-end investment companies.
FN3 Although one cent differences in net asset values per share of $10.00 might appear to be insignificant, the effects of such differences can be material to the decisions of investors when translated into differences in rates of return. Moreover, the inequitable effects of amortized cost valuation can occur in the case of any opened investment company where a significant proportion of a company's portfolio consists of debt securities valued at amortized cost. The extent of such inequitable effects will, of course, depend upon changes in interest rates and the level of a company's sales and redemptions of shares.
Generally, \"money market\" funds are open-end investment companies which invest primarily in short-term debt instruments. They provide a vehicle to permit investors to take advantage of what at times may be the higher short-term interest rates earned on large investments. Through a pooling of money these funds enable the purchase of larger denomination instruments than could normally be bought by the individual small investor.. These funds have also attracted investments from corporations, bank trust departments, and other institutional investors. Another characteristic of money market funds is the short-term investment perspective of many shareholders. Although the portfolio composition of \"money market\" funds is variable both in terms of the types of securities purchased and their maturities, the portfolios of such funds typically include U.S. Government and government agency issues, certificates of deposit, banker's acceptances, and commercial paper.
Section 22(c) of the Investment Company Act by reference to section 22(a) of the Investment Company Act, authorizes the Commission to adopt rules prescribing, inter alia, methods for computing the minimum purchase price and maximum redemption price of redeemable securities issued by a registered investment company:
***for the purpose of eliminating or reducing so far as reasonably practicable any dilution of the value of other outstanding securities of such company or any other result of*** purchase, redemption, or sale which is unfair to holders of such other outstanding securities.***
Section 2(a)(41) of the Investment Company Act defines \"value\", as here relevant to mean:
(B)*** (i) with respect to securities for which market quotations are readily available, the market value of such securities; and
(ii) with respect to other securities and assets, fair value as determined in good faith by the [registered investment company's] board of directors ***
Rule 2a-4 promulgated under the Investment Company Act provides, in part, that the \"current net asset value\" of a redeemable security issued by a registered investment company used in computing its price, for the purposes of distribution and redemption, means:
***an amount which reflects calculation*** made substantially in accordance with the following, with estimates used where necessary or appropriate:
(1) Portfolio securities with respect to which market quotations are readily available shall be valued at current market value, and other securities*** shall be viewed at fair value as determined in good faith by the board of directors***
Now that both the Commission and the money market fund industry have had the benefit of experience with this relatively new investment product, and to help insure that shares of such funds are sold and redeemed at prices reflecting the current market value or fair value of such funds' portfolio securities, the Commission has concluded that it is inconsistent with the provisions of Rule 2a-4 for a money market fund to determine the fair value of debt securities which mature at a date more that 60 days subsequent to the valuation date on an amortized cost basis.
Although debt securities with remaining maturities in excess of 60 days should not be valued at amortized cost, the Commission will not object if the board of directors of a money market fund, in good faith, determines that the fair value of debt securities originally purchased with remaining maturities of 60 days or less shall be their amortized cost value unless the particular circumstances dictate otherwise. FN4 Nor will the Commission object if, under similar circumstances, the fair value of debt securities originally purchased with maturities in excess of 60 days, but which currently have maturities of 60 days or less, is determined by using amortized cost valuation for the 60 days prior to maturity, such amortization being based upon the market or fair value of the securities on the 61st day prior to maturity. FN5
FN4 The fair value of securities with remaining maturities of 60 days or less may not always be accurately reflected through the use of amortized cost valuation, due to an impairment of the creditworthiness of an issuer, or other factors. In such situations, it would appear to be incumbent upon the directors of a fund to recognize such factors and take them into account in determining \"fair value.\"
FN5 A fund also may use amortized cost valuation for a period less than 60 days prior to maturity, in which case the principles indicated above would also be applicable.
The Commission believes that money market funds and those other companies to which this interpretation is applicable should value debt securities with greater than 60 days remaining to maturity based upon current market quotations if readily available or, if such quotations are not readily available, in such a manner as to take into account any unrealized appreciation or depreciation due to changes in interest rates and other factors which would influence the current fair values of such securities. FN6 These methods are sometimes referred to as \"marking to market.\" In determining \"fair value\" by reference to current interest rates and other factors, the board of directors of a money market fund may, of course, utilize whatever method it determines in good faith to be most appropriate. The method utilized could be based in part, for example, upon quotations by dealers or issuers for securities of similar type, quality and maturity.
FN6 In ASR 118 [see Section 404.03], the Commission stated that: As a general principle, the current \"fair value\" of an issue of securities being valued by the board of directors would appear to be the amount which the owner might reasonably expect to receive for them upon their current sale. In that release, the Commission noted various factors that might be considered in arriving at \"fair value\", which factors included: Yield to maturity with respect to debt issues*** an evaluation of the forces which influence the market in which these securities are purchased and sold*** (and the) price and extent of public trading in similar securities of the issuer or comparable companies, and other relevant matters.
Except in the circumstances delineated above, the Commission believes that, in view of the experience which has been gained with respect to the characteristics of money market funds, the use of the amortized cost method of valuation by a money market fund cannot in the future represent a \"good faith\" effort to determine the \"fair value\" of portfolio securities for purposes of Rule 2a-4; such valuation fails to consider the impact of market factors subsequent to the date a debt security is purchased on the value of such security. Moreover, the probability that amortized cost valuation will not approximate \"fair value\" is progressively greater for securities of increasingly longer maturities. The Commission believes that the use of amortized cost valuation by money market funds in valuing securities with remaining maturities in excess of 60 days is not an appropriate estimate of market value or \"fair value\" and further that, because alternative valuation procedures which consider market factors are available, use of amortized cost valuation under such circumstances as an estimate is not necessary. This standard should help insure that fund shares are sold and redeemed at prices reflecting the appropriate proportionate share of funds' current net assets, and minimize the potential for dilution of the assets and returns of existing shareholders.
The Commission is also of the view that money market fund shareholders should be accurately credited with the effects of any unrealized appreciation or depreciation that may occur when the value of a fund's portfolio fluctuates. If such effects are not reflected in either a fund's net asset value or its distributions to shareholders, as a practical matter the result would be a situation analogous to that which would exist if amortized cost valuation were used, and similar dilutive effects could occur. Such may be the case, for example, where a money market fund \"marks to market,\" but declares a daily dividend of accrued interest income and reflects any remaining unrealized appreciation or depreciation in a \"floating\" net asset value of $1.00 nominal value per share, rounded to the nearest cent. Under these circumstances, unrealized capital changes which could materially affect the value of such fund's portfolio, would ordinarily not be of sufficient magnitude to cause the net asset value to change by one cent. The effects of unrealized appreciation and depreciation in the case of a fund with a \"floating\" $1.00 net asset value per share, would generally appear in the third and fourth decimal places, and when rounded to the third decimal place (i.e., tenths of one cent) would still not have a one cent impact on the net asset value. Moreover, if such a one cent change should occur, dilution may also result, since a relatively small change in net asset value would cause a larger change in the computed net asset value per share due to rounding. For example, if in the type of fund described above the net asset value was calculated accurately to three decimal places and a change in net asset value from $1.004 to $1.006 occurred, such change of $.002 would cause the net asset value, when rounded to the nearest cent, to change by one full cent.
To alleviate these results and insure that shareholders are more properly credited for capital appreciation or depreciation, the Commission believes that any money market fund which reflects capital changes in its net asset value per share should calculate, and utilize for purposes of sales and redemptions, a current net asset value per share with an accuracy of one-tenth of one percent (equivalent to the nearest one cent on a net asset value of $10.00). Any less precise calculation by such a fund might have the effect of masking the impact of changing values of portfolio securities and therefore might not \"reflect\" the funds calculations pertaining to its portfolio valuation as required by Rule 2a-4.
The following table identifies the changes made to this Subtopic.
The following table identifies the changes made to this Subtopic.
The Not-for-Profit Entities Topic contains several Subtopics for investments held by
not-for-profit entities (NFPs) because the guidance differs by form of the investment. The Subtopics are:
- a
Financially Interrelated Entities
- b
Investments—Debt Securities
- bb
Investments—Equity Securities
- c
Investments—Other
- d
Consolidation.
This Subtopic establishes standards of financial accounting and reporting for all investments in debt securities held by NFPs. It also establishes disclosure requirements for those and most other investments held by NFPs.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
958-10-15, with specific exceptions noted below.
The application of this Subtopic by not-for-profit, business-oriented health care entities, as described in paragraph 954-10-05-2(b), is subject to additional guidance in Subtopic 954-220. The measurement standards in Section 958-320-35 apply to all investments in debt securities, including mortgage-backed securities. - a
- b
The reporting standards in paragraphs and Section 958-320-50 apply to all investments held by not-for-profit entities (NFPs), except those described in the following paragraph. The guidance in this Subtopic does not apply to any of the following: - a
An investment in equity securities that is accounted for under the equity method in accordance with paragraph 958-810-15-4 or in accordance with Subtopic 958-321. - b
An investment in a subsidiary that is consolidated in accordance with paragraph 958-810-15-4 or . - c
An investment in a derivative instrument that is subject to the requirements of Topic 815. That is, an investment in an option on securities shall be accounted for under the requirements of Subtopic 815-10 if the option meets the definition of a derivative instrument, including the criteria for net settlement in paragraph 815-10-15-99. - d
Short sales of securities (sales of securities that the seller does not own at the time of sale), because they are obligations to deliver securities, not investments. Short sale obligations are addressed in the guidance for certain industries (see paragraph 940-320-35-1 with respect to broker-dealers and paragraph 942-405-35-1 with respect to depository institutions). For guidance on evaluating whether a short sale transaction involves a derivative instrument, see paragraph 815-10-55-57. - e
If an investment would otherwise be in the scope of this Subtopic and it has within it an embedded derivative that is subject to the requirements of Topic 815, the host contract (as described in paragraph 815-15-05-1) remains within the scope of this Subtopic. When determining whether an instrument is within the scope of this Subtopic, an entity shall not look through the form of its investment to the nature of the securities held by an investee. 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. In the specific situation described, the investment would be considered an equity security.
This Subtopic does not specify methods to be used for measuring the amount of interest income.
Pursuant to paragraph 958-605-25-2, if a debt security is acquired by contribution, it shall be recognized as an asset and as a revenue or gain in the period received. If a not-for-profit entity (NFP) is holding an investment as an agent and has little or no discretion in determining how the investment income, unrealized gains and losses, and realized gains and losses resulting from that investment will be used, the investment's acquisition shall be reported as an agency transaction. That is, the NFP agent recognizes the acquisition as an asset and a liability rather than as a change in net assets. A debt security shall be initially measured at its acquisition cost (excluding brokerage and other transaction fees) if it is purchased. It shall be initially measured at fair value if it is received as a contribution or through an agency transaction. All investments in debt securities shall be measured at fair value in the statement of financial position. If a not-for-profit entity (NFP) is holding an investment as an agent and has little or no discretion in determining how the investment income, unrealized gains and losses, and realized gains and losses resulting from that investment will be used, those investment activities shall be reported as agency transactions and, therefore, as changes in assets and liabilities, rather than as changes in net assets. For each period for which a statement of financial position is presented, an NFP shall disclose the aggregate carrying amount of investments by major types, for example, equity securities, U.S. Treasury securities, corporate debt securities, mortgage-backed securities, oil and gas properties, and real estate.
For the most recent period for which a statement of financial position is presented, an NFP shall disclose the nature of and carrying amount for each individual investment or group of investments that represents a significant concentration of market risk, such as risks that result from the nature of the investments or from a lack of diversity of industry, currency, or geographic location.
Paragraph 825-10-50-21 requires disclosures about all significant concentrations of credit risk arising from all financial instruments, (including significant concentrations of credit risk arising from derivative instruments accounted for under Topic 815), whether from an individual counterparty or groups of counterparties. Information about realized and unrealized gains and losses and about historical costs of investments may be useful in some circumstances. For example, if a state adopted a law that allows an NFP to spend only realized gains or if an NFP pays taxes on realized gains and losses, information that distinguishes between realized and unrealized amounts may be useful. Thus, this Subtopic does not preclude disclosing that information.
The term debt security includes any security representing a creditor relationship with an entity. Thus, the term debt security includes all of the following securities, among other items: - a
U.S. Treasury securities
- b
U.S. government agency securities
- c
Municipal securities
- d
Corporate bonds
- e
Convertible debt
- f
Commercial paper
- g
All securitized debt instruments, such as collateralized mortgage obligations and real estate mortgage investment conduits
- h
Interest-only and principal-only strips
- i
Preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor
- j
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.
However, the term debt security excludes all of the following instruments: - a
Option contracts
- b
Financial futures contracts
- c
Forward contracts
- d
Lease contracts
- e
Swap contracts
- f
Receivables that do not meet the definition of security and, thus, are not debt securities, for example:
- 1
Trade accounts receivable arising from sales on credit
- 2
Loans receivable arising from consumer, commercial, and real estate lending activities of financial institutions and not-for-profit entities (NFPs).
However, if those receivables have been securitized, they would meet the definition of a security, and thus be a debt security. Paragraph 320-10-55-3 explains that, even if a loan could readily be converted into a security, the loan is not a debt security until it has been securitized.
This Example illustrates the disclosures required by paragraph 958-320-50-2 and a statement of activities that reports investment return in accordance with paragraphs . This Example has the following assumptions:
- a
Not-for-Profit Entity A (NFP A) invests cash in excess of daily requirements in short-term investments; during the year, those investments earned $1,275.
- b
Most long-term investments of NFP A's endowments are held in an investment pool, which earned income of $11,270 and had net gains of $15,450.
- c
Certain endowments are separately invested because of donors' requirements. The investments of those endowments earned income of $1,000 and increased in value by $1,500.
- d
- e
- f
NFP A's governing board appropriated for expenditure $1,025 from its short-term investments.
- g
NFP A had $25 of gross programmatic investing income. The expenses related to the programmatic activity are included in operating expenses.
A statement of activities of NFP A is illustrated as follows. -
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Not-for-Profit Entity A Statement of Activities \"Year Ended June 30, 20X1\" Without Donor Restrictions With Donor Restrictions Total \"Revenues, gains, and other support:\" Contributions \" $X,XXX \" \" $ X,XXX \" \" $XX,XXX \" Investment return appropriated from short-term investments \" 1,025 \" Fees \" X,XXX \" \" X,XXX \" Programmatic investing return 25 Other XXX XXX Net assets released from restrictions Investment return appropriated and released for current operations from donor-restricted endowment \" 4,500 \" \" (4,500)\" [Other net assets released from restrictions] \" X,XXX \" \" (X,XXX) \" \"Total operating revenues, gains, and other support\" \" XX,XXX \" \" XX,XXX \" Expenses: Program A \" XX,XXX \" Program B \" X,XXX \" Program C \" X,XXX \" Management and general \" X,XXX \" Fundraising \" X,XXX \" Total operating expenses \" XX,XXX \" Operating revenues in excess of expenses \" XX,XXX \" Other changes: \"Investment return, net\" \" 1,275 \" \" 29,220 \" \" 30,495 \" Investment return appropriated for current operations from short-term investments \" (1,025)\" [Other items considered to be nonoperating] \" X,XXX \" \" X,XXX \" \" X,XXX \" Change in net assets \" $XX,XXX \" \" $ X,XXX \" \" $XX,XXX \"
NFP A would add the following illustrative text to its note to financial statements that describes the measure of operations. In accordance with the requirements in paragraph 958-320-50-2, an NFP would disclose the aggregate carrying amount of investments by major types and may choose to combine these disclosure requirements with disclosures about the level in the fair value hierarchy as required in Topic 820 on fair value measurement. -
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20X1 Quoted Prices in Active Markets Significant Other Observable Inputs Significant Unobservable Inputs Measured at Net Asset Value (Level I) (Level II) (Level III) 20X1 Total Investments Cash equivalents held by investment managers \" $19,366 \" \" $19,366 \" U.S. common and preferred stocks \" 61,190 \" \" 61,190 \" International common and preferred stocks \" 71,973 \" \" 71,973 \" Fixed income \" $40,920 \" \" 40,920 \" Equity funds \" 20,210 \" \" $10,093 \" \" $10,068 \" \" 40,371 \" - Hedge funds \" 26,248 \" \" 26,248 \" - Private equity \" 39,090 \" \" 39,090 \" - Real estate \" 33,520 \" \" 33,520 \" Pooled endowment\tPooled endowment \" 172,739 \" \" 40,920 \" \" 43,613 \" \" 75,406 \" \" 332,678 \" Split-interest agreements U.S. common and preferred stocks \" 12,970 \" \" 12,970 \" Fixed income \" 6,635 \" \" 6,635 \" Total investments \" $185,709 \" \" $47,555 \" \" $43,613 \" \" $75,406 \" \" $352,283 \"
For guidance on recognition by an NFP of the gain or loss on a hedging instrument or a nonhedging derivative instrument, see paragraphs
815-25-35-19 and
815-10-35-3, respectively.
The following table identifies the changes made to this Subtopic.
This Subtopic provides guidance on debt and equity securities investments for
health and welfare benefit plans.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
965-10-15.
The accrual basis of accounting requires that purchases of securities be recorded on a trade-date basis. However, if the settlement date is later than the financial statement date, accounting on a settlement-date basis for such purchases is acceptable if both of the following conditions exist: - a
The fair value less costs to sell, if significant, of the securities purchased just before the financial statement date does not change significantly from the trade date to the financial statement date. - b
The purchases do not significantly affect the composition of the plan's assets available for benefits.
See Subtopic
965-325 for guidance on accounting for other investments, in particular investment and insurance contracts, of
health and welfare benefit plans.
Plan investments in the form of equity or debt securities shall be reported at their fair value less costs to sell, if significant, at the financial statement date. The accrual basis of accounting requires that sales of securities be recorded on a trade-date basis. However, if the settlement date is later than the financial statement date, accounting on a settlement-date basis for such purchases is acceptable if both of the following conditions exist: - a
The fair value less costs to sell, if significant, of the securities sold just before the financial statement date does not change significantly from the trade date to the financial statement date. - b
The sales do not significantly affect the composition of the plan's assets available for benefits.
Ordinarily, information regarding the net appreciation or depreciation in the fair value less costs to sell, if significant, of investments shall be disclosed in the notes to financial statements. ![](\"/asc-img/GUID-E801FBC8-04EB-4075-96C5-751F1EE8CC85-low.gif\")