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Under ASC 310-20-35-18, generally the difference between the fair value (i.e., the cost) of a debt security at acquisition and the face amount should be treated as discount or premium and accreted or amortized as an adjustment to interest income over the life of the security in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period. ASC 946-320-35-20 states that premiums and discounts should be amortized using the interest method. However, other methods of accretion or amortization (e.g., straight-line) may be used if the results obtained are not materially different from those that would result from the interest method. Because an investment company carries its investments at fair value and reports both realized and unrealized gains and losses, accretion or amortization of discounts or premiums does not affect its net asset value or results of operations.
TIS Section 6910.21 has clarified the Audit Guide to indicate that GAAP requires an investment company to amortize/accrete premium/discount on both long and short positions.
In 2017, the FASB issued ASU 2017-08 Receivables - Nonrefundable Fees and Other Costs which amends the amortization period for certain purchased callable debt securities issued at a premium. Under the new guidance, the premium on these securities will be amortized to the earliest call date rather than to the maturity date, which is required under the current guidance. The amendments in this Update are effective on January 1, 2019 for public business entities with early adoption permitted. All other entities have another year to adopt.
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