A debt security is an investment that represents a creditor relationship with the issuer. The Master Glossary includes a list of items that are and are not debt securities. However, neither list is all inclusive. While the legal classification of the security can be a factor in determining whether the security meets the accounting definition, the definition in ASC 320 is based on the Uniform Commercial Code at the time the guidance was developed more than 20 years ago, and may not be consistent with the legal definition of a security today. For more information on the definition of a security and on the types of instruments covered by this definition, see LI 3.2.2. When accounting for these investments, NFPs apply the guidance in ASC 958-320 rather than ASC 320.

ASC 958-320-30-1 describes the initial and subsequent measurement of debt securities.

Under ASU 2016-01, acquisition cost excludes brokerage and other transaction fees; prior to adoption of the ASU, brokerage and other transaction fees are included in initial measurement.

Subsequent to initial recognition, debt securities are measured at fair value in accordance with ASC 820 at each reporting date. Changes in fair value are reflected in the appropriate category of net assets (i.e., with or without donor restrictions). See NP 9.11 for additional information on reporting of investment return.

For NFP HCOs, incremental guidance in ASC 954-320 tailors the guidance in ASC 958-320 to more closely resemble the business entity reporting model in ASC 320. NFP HCOs must classify their debt securities as “trading” or “available for sale” (or “other than trading”); gains, losses, and impairments are included in or excluded from the performance indicator based on those designations in the same manner as those items would be included in or excluded from net income of a business entity. Because of the overarching requirement in ASC 958-320 to carry all debt securities at fair value, use of the held-to-maturity classification (which permits business entities to measure debt securities using an amortized cost basis) is not permitted for NFPs. Changes in fair value of available-for-sale debt securities that are part of net assets without donor restrictions are reported below the performance indicator. All other changes in value related to debt securities included in net assets without donor restrictions, including realized gains and losses and impairment losses, are included in the performance indicator. Other NFPs wishing to more closely parallel business entity reporting may voluntarily classify debt securities into categories using the NFP HCO classification parameters.

LI 8 discusses the application of the available-for-sale debt security impairment model in accordance with ASC 326-30.