FASB shifts stance on held-to-maturity debt securities, aligns with loan receivables

In a closely watched decision, the FASB voted on Oct. 2, 2024, to revise aspects of proposed rules on purchased financial assets (PFA), altering the treatment of held-to-maturity (HTM) debt securities, and modifying other key provisions.

The board tentatively voted 4 to 3 to include HTM securities, excluding beneficial interests, in the proposed "gross-up approach," a change from what was proposed. This approach would recognize financial assets, such as loans or debt securities, at their full face value, without considering expected credit losses.

The decision would mark a shift from current practices, where HTM debt securities were not subject to the gross-up approach. The new approach aims to align the accounting treatment of HTM securities more closely with loan receivables, addressing stakeholder feedback and operational concerns.

"I think in general, credit-impaired securities that are in the portfolios should be treated like loans," FASB member Frederick Cannon said. "I mean, we have HTM largely because it's hard to differentiate between securities and loans," he said. "And therefore, I really wouldn't want those having different accounting."

HTM securities are debt securities that an entity intends to hold until maturity, rather than selling them before maturity. Examples include bonds, notes, commercial paper, and certificates of deposit (CDs).

The issue of HTM debt securities has been at the forefront of recent banking challenges, with institutions such as Silicon Valley Bank, Signature Bank, and First Republic Bank highlighting the risks associated with holding these securities in a changing interest rate environment.

Off-balance sheet credit exposures, other issues

In addition to the changes to HTM debt securities, the board also made decisions on three other issues in redeliberations of Proposed Accounting Standards Update (ASU) No. 2023-ED400, Financial Instruments-Credit Losses Purchased Financial Assets, which was released for public comment last year.

The board voted 4 to 3 to include off-balance-sheet credit exposures within the scope of the gross-up approach, requiring recognition of an expense through Other Comprehensive Income (OCI) when an entity enters into a forward contract or purchases an unfunded commitment. This approach wasn't covered in the proposal, and it also differs from current GAAP, which only recognizes credit losses when the entity has a contractual right to extend credit.

Using the same accounting rules in this area would help investors understand a company's past success and its ability to make money in the future, according to the discussions.

"I think it reflects the economic changes on a timely basis and current periods," FASB member Marsha Hunt said. "So while some may feel that day one accounting seems awkward, I think it gets us meaningful financial statements after that point."

The board also voted 6 to 1 to exclude contract assets and lease receivables from the gross-up approach, and unanimously to exclude trade accounts receivable from the approach. The revisions are expected to provide more consistent and transparent financial reporting, addressing concerns raised by stakeholders and responding to the challenges faced by banks in managing HTM securities.

Challenges remain: two issues deferred

The board's progress was slowed by two thorny issues: credit cards and similar revolving credit, and available-for-sale (AFS) debt securities, which required further consideration.

Accountants raised concerns about the gross-up approach's operability on credit cards and similar revolving credit, citing unit of account and individual allocation challenges, according to the discussions.

The staff recommended that the board exclude credit cards, consumer revolvers, and commercial revolvers from the scope of the gross-up approach to reduce complexity and costs. The board discussed various alternatives, with some members preferring to retain current GAAP or make specific exceptions. No view won.

Similarly, the staff recommended eliminating the gross-up approach for all AFS debt securities but amend interest income recognition to accrete to expected cash flows. The board was divided, with some members supporting retaining current GAAP and others favoring different approaches.

The board opted to revisit both issues in future discussions, armed with additional data and clearer definitions. Additionally, meeting remarks hinted that the proposal may be re-released for further public scrutiny.

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