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FASB issues ed on prepayment risk, DM on consolidations.

The Financial Accounting Standards Board issued an exposure draft on accounting for investments with prepayment risk, with a comment period that ends December 31, 1991.

The ED applies to accounting by investors or creditors for loans, receivables or other debt securities subject to prepayment, including mortgage loans and callable corporate debt. It proposes anticipation of prepayments whenever prepayments are probable; the timing and amount of prepayments can be estimated; and the impact on the effective yield of anticipating prepayments would be significant.

The proposal also would require the effective yield to be recalculated and the carrying amount of the investment adjusted if actual cash flows and estimates of future cash flows change as a result of prepayments. That adjustment would be required to be recognized currently in income.

If adopted as a final statement, the proposal would be effective for transactions entered into in fiscal years beginning after December 15, 1992.

Consolidation DM. The FASB also issued a discussion memorandum on consolidation policy and procedures, with public comment ending July 15, 1992. The basic issues covered in the DM are whether and how the separate financial statements of two or more affiliated legal entities should be combined into a single set of consolidated financial statements.

The "whether" issues focus on the relative importance of control and ownership as conditions for consolidation and on the definition of "control." The "how" issues have to do with procedural matters, including how to measure the subsidiary's identifiable assets and liabilities at the acquisition date, how to measure good will at the acquisition date and how to eliminate unrealized profit or loss on intercompany transactions.

The DM is part of a larger project on the FASB's agenda that will address various aspects of accounting for affiliations between entities.

Single copies of the ED, Accounting for Investments with Prepayment Risk, or the DM, Consolidation Policy and Procedures, are available from the FASB Order Department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Telephone: (203) 847-0700.
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Publication:Journal of Accountancy
Date:Nov 1, 1991
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