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For debt securities transferred between categories, an entity should:
  • Account for the security through the date it is reclassified based on the accounting model applicable prior to its reclassification.
  • On the date the security is reclassified, reverse (through earnings) any allowance for credit losses previously recorded on the debt security.
  • Reclassify/transfer the debt security into the new category at its amortized cost basis (which is reduced by any previous writeoffs but excludes any allowance for credit losses). If a debt security is being reclassified from available for sale to held to maturity, the amortized cost basis is increased or decreased by the amount of any remaining unrealized holding gain or loss reported in accumulated other comprehensive income.
  • Determine if an allowance for credit losses is necessary for a held-to-maturity debt security in accordance with ASC 326-20 or for an available-for-sale debt security in accordance with ASC 326-30.
When transferring a debt security from held to maturity to available for sale, an entity should report any unrealized gain or loss on the debt security at the date of transfer in AOCI, excluding the amount recorded in the allowance for credit losses determined in accordance with ASC 326-30. See LI 8 for further information. In addition, an entity should consider whether the transfer of the debt security calls into question the entity’s intent and ability to hold securities that remain in the held-to-maturity category to maturity (i.e., would the transfer “taint” the held-to-maturity portfolio).
When transferring a debt security from available for sale to held to maturity, the held-to-maturity security’s initial amortized cost basis will include the available-for-sale security’s unrealized gains or losses deferred in AOCI. This could create a premium or discount associated with the held-to-maturity security upon transfer, which should be amortized as an adjustment to yield in accordance with ASC 310-20. In addition, an entity should continue to report the remaining unrealized gain or loss at the date of transfer in AOCI and amortize it over the remaining life of the held-t0-maturity security as an adjustment to yield. The amortization of these unrealized gains or losses within AOCI may offset the effect on interest income of the amortization of the held-to-maturity security’s premium or discount.
For debt securities transferred between categories, the income statement impact of amounts reversed or established associated with the valuation allowance and/or the allowance for credit losses should be presented gross.
Refer to ASC 320-10-35-10, ASC 320-10-35-10A, and ASC 320-10-35-10B for further information.

ASC 320-10-35-10

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:

  1. 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.
  2. 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.

ASC 320-10-35-10A

For a debt security that is transferred into the available-for-sale category from the held-to-maturity category, an entity shall:

  1. Reverse in earnings any allowance for credit losses previously recorded on the held-to-maturity debt security at the transfer date
  2. 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)
  3. Determine if an allowance for credit losses is necessary by following the guidance in Subtopic 326-30
  4. 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)
  5. 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 320-10-35-8 through 35-9.

ASC 320-10-35-10B

For a debt security that is transferred into the held-to-maturity category from the available-for-sale category, an entity shall:

  1. Reverse in earnings any allowance for credit losses previously recorded on the available-for-sale debt security at the transfer date
  2. 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
  3. Evaluate the debt security for an allowance for credit losses by following the guidance in Subtopic 326-20
  4. 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.

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