Ref #2015-23
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Prepayment Penalties and Presentation of Callable Bonds – Bifurcation of Agenda Item 2015-04
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
Based on comments received from interested parties, staff recommended that the Working Group
bifurcate the contents of agenda item 2015-04: Prepayment Penalties and Amortization of Callable Bonds
into two separate Form A’s. The topic of amortization on callable bonds (including bonds with make
whole call provisions) will continue to be documented in agenda item 2015-04; with the topics of
accounting for prepayment penalties and presentation of callable bonds (including make whole call
provisions) being documented in this agenda item (2015-23).
SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities currently has guidance requiring
prepayment penalties and acceleration fees received upon liquidation of a bond prior to its scheduled
termination date to be reported as investment income upon receipt. However, this guidance is conflicting
with existing annual statement instructions, as well as how information currently flows on Schedule DPart 4. Furthermore, with the differences in types of calls (e.g., make-whole call provisions), the
“penalty” may not be as easily identifiable (e.g., a standard call price of 105 indicates a penalty of 5).
This agenda item requests Working Group direction on how they would like to proceed with the
accounting treatment of prepayment penalties and acceleration fees, either as investment income (current
SSAP No. 26 guidance) or as realized capital gains (subject to authoritative literature within SSAP No.
7—Asset Valuation Reserve and Interest Maintenance Reserve). A key issue discussed throughout this
document and posed to the Working Group, is whether they believe that prepayment penalties should be
reflected within IMR, or if the current accounting treatment is appropriate. To illustrate the impact to IMR
under the current accounting treatment (investment income) and the proposed option of realized capital
gains, staff has documented examples below.
Investment Income
1/1/2016
Call
Exercised
Consideration
Par
Value
BACV
at
Disposal
Date
Gain
(Loss)
BACV-Par
Penalty
Investment
Income
Consideration-Par
Decrease to
IMR**
104
100
102
(2)
4
2
** As illustrated, the holder of the bond recognizes two accounting benefits at the exercise date; 1)
The loss recognized (BACV less Par) will decrease the IMR liability (balance sheet benefit) and 2)
The penalty recognized as investment income (Consideration less Par) would increase revenue
(income statement benefit).
Ref #2015-23
Realized Capital Gains
1/1/2016
Call
Exercised
Consideration
Par
Value
BACV
at
Disposal
Date
Gain
(Loss)
BACV-Par
Penalty
Gain (Loss)
Consideration-Par
Net
Increase to
IMR*
104
100
102
(2)
4
2
* As detailed above, if this scenario was accounted for under the current accounting treatment of
investment income, the holder of the bond would recognize two accounting benefits at exercise date.
As shown in this table, the gains/losses at the exercise date offset, leaving an increase to the IMR
liability of 2.
To determine the consistency of reporting (on Schedule D-Part 4) across entities for a bond called under a
make whole call provision, staff reviewed a CUSIP, which impacted 21 reporting entities, noting that 15
of the entities reported the difference between Consideration and BACV (at the call date) within the
Realized Gain/Loss Column (Col. 18) and with no investment income recorded in column 20 (therefore
differing from SSAP No. 26 and Schedule D-Part 4 instructions). Additionally, these 15 entities all
reported bond interest equal to the same percentage of Par in column 20. Therefore, it appears that (at
least for purposes of Schedule D-Part 4) some entities are electing to record the prepayment penalties
as realized gains and not within investment income. For those entities using this reporting, staff
welcomes comments on whether these balances are included or excluded from the IMR calculation.
Existing Authoritative Literature:
SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities:
14.
A bond may provide for a prepayment penalty or acceleration fee in the event the bond is
liquidated prior to its scheduled termination date. Such fees shall be reported as
investment income when received.
SSAP No. 37—Mortgage Loans:
(Staff Note: Similar language is also included in SSAP No. 37 for investment income.)
11.
A mortgage loan may provide for a prepayment penalty or acceleration fee in the event
the loan is liquidated prior to its scheduled termination date. Such fees shall be reported as
investment income when received.
SSAP No. 43R—Loan-Backed and Structured Securities:
(Staff Note: Similar language is also included in SSAP No. 43R for investment income.)
11.
A loan-backed or structured security may provide for a prepayment penalty or
acceleration fee in the event the investment is liquidated prior to its scheduled termination date.
These fees shall be reported as investment income when received.
Additional Information – Superseded SSAP Guidance:
INT 99-04: Recognition of Prepayment Penalties Upon Adoption of Codification:
1.
SSAP No. 37 requires insurers to report a prepayment penalty or acceleration fee as
investment income when received. Currently, some insurers record these fees as realized gains
and thus amortize them through IMR. SSAP No. 37 also stipulates a change resulting from the
Ref #2015-23
adoption of the statement be accounted for as a change in accounting principle. Upon adoption of
Codification, it is probable that some insurers might continue to amortize the existing gain
included in IMR and recognize subsequent fees as investment income.
2.
Should an insurer release all unamortized amounts included in IMR and related to
prepayment penalties upon adoption of Codification and recognize such change in accordance
with SSAP No. 3— Accounting Changes and Corrections of Errors (SSAP No. 3)?
INT 99-04 Discussion
3.
The working group reached a consensus to instruct insurer’s to release all unamortized
amounts included in IMR related to prepayment penalties upon adoption of Codification and
recognize such change in accordance with SSAP No. 3.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): The topic addressed in this
agenda item was previously discussed and exposed for comment at the Spring 2015 National Meeting, as
outlined in agenda item 2015-04. Comment Letters addressing agenda item 2015-04 are included as
an attachment to the Summer 2015 National Meeting Materials.
As detailed in the INT 99-04 excerpt above, prior to codification, some insurers were recording
prepayment penalties and acceleration fees on mortgage loans as realized gains and amortizing through
IMR. While the intent of INT 99-04 was to no longer have prepayment penalties or acceleration fees
recognized as realized gains upon adoption of Codification (and release all unamortized amounts within
IMR); it was noted, through discussions with regulators and interested parties, that some insurers would
still record these fees as realized gains and amortize through IMR. If the Working Group chooses to
recognize prepayment penalties and acceleration fees as realized capital gains for bonds, staff also
recommends revisions to SSAP No. 37—Mortgage Loans to clarify this accounting treatment.
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation:
Summary: It is recommended that the Working Group move agenda item 2015-23 to the
nonsubstantive active listing and expose for comment three potential options for the accounting and
presentation treatment for prepayment penalties. The three options include: 1) maintaining current
treatment of investment income, 2) reported as realized capital gains, subject to the authoritative
literature within SSAP No. 7—Asset Valuation Reserve and Interest Maintenance Reserve and 3)
reported as realized capital gains, but excluded from the calculation of IMR. Based on comments
received, it is requested that the Working Group direct staff on the accounting and presentation
treatment they prefer. Based on the Working Group’s direction, staff will prepare revisions (for
exposure at a future meeting of the Working Group) to SSAP Nos. 26, 37 and 43R (as applicable) and the
Annual Statement Blanks and Instructions (as applicable) to clarify the accounting treatment and
reporting presentation for prepayment penalties and acceleration fees.
As further detailed in the “Additional Discussion” section, staff request comments from the Working
Group and interested regulators on the following:

Do the current instructions/schedules for IMR provide the appropriate level of detail for
review and analysis, or would additional schedules and/or instructions be beneficial?

Would a disclosure pertaining to callable bonds (including make whole call provisions)
would be beneficial?
Ref #2015-23
Additional Discussion Supporting the Proposed Accounting Treatments of Prepayment Penalties:
As noted throughout the agenda item and comments received from interesting parties, the key issue
surrounding prepayment penalties is whether the penalties should be subject to IMR and the authoritative
literature in SSAP No. 7. Based on review of interested parties’ comments and discussion with NAIC
staff, there appears to be diversity in the reporting of prepayment penalties, both on Schedule D and the
calculation of IMR. In addition, based on review of the Annual Statement Blanks and Instructions for
IMR, it appears that there is not a clear way for regulators to identify which individual securities were
included or excluded from the calculation of IMR.
While the intent of a make whole call provision is to make the bond holder “whole” if the issuer elects to
call the bond prior to maturity, it has been identified that an increasing number of bonds being called
under this provision are leading to negative total returns for the bond holder. (A negative total return
is a LOSS to an insurer.) This occurs when the loss recognized (BACV less Par) exceeds the prepayment
penalty received (Consideration less Par). Additionally, research indicates that bonds containing make
whole call provisions have frequently been listed as “non-callable” on bond indexes. Therefore, there is
concern that an insurer could potentially be holding a callable bond as a result of the make whole call
provision and not be aware it is callable. Also, while there are instructions for Schedule D to identify
callable bonds, it appears that the reporting of this information is inconsistent across entities.
Based on the comments received, staff has documented three proposed options for the accounting
treatment of prepayment penalties. The purpose of these options is to provide greater transparency
regarding the reporting of callable bonds (including those with make whole call provisions) and
prepayment penalties. Staff recommends that the Working Group review these options and direct staff
to proceed with drafting revisions for the accounting treatment that they prefer.
Based on the direction elected by the Working Group, staff will proceed with drafting proposed revisions
to SSAPs, Annual Statement Blanks and Instructions (and draft a blanks proposal) and Disclosures.
Below, staff has identified the following areas to be considered by the Working Group for potential
revisions (if applicable based on WG direction). Staff welcomes comments from regulators and interested
parties on potential revisions to aid in the transparency and reporting of callable bonds, including those
with make whole call provisions.
Staff Note: The Investment Reporting (E) Subgroup is currently discussing revisions to the presentation of
Schedule D. The actions taken by this subgroup and the Blanks (E) Working Group will be considered
when drafting proposed revisions to Annual Statement Blanks and Instructions.
Schedule D-Part 1:
 Revisions to instructions/blanks to identify callable bonds, including those with make whole
call provisions
Schedule D-Part 4:
 Revisions to instructions/blanks to identify bonds that were sold, redeemed, or otherwise
disposed of as a result of a call provision (including make whole call).
 Revisions to instructions/blanks to identify the amount of investment income recognized as a
result of a call provisions (including make whole call).
IMR:
 Revisions to clarify the accounting treatment for prepayment penalties.
Ref #2015-23
SSAP Nos. 26, 37 and 43R:
 Revisions to clarify the accounting treatment for prepayment penalties.
 Revisions to SSAP No. 26 to create a disclosure pertaining to callable bonds (including bonds
with make whole call provisions).
Option One: Continued treatment as investment income (Penalties do not impact IMR)
Based on the current guidance within SSAP No. 26, paragraph 14, these prepayment and acceleration fees
are classified as investment income. The following would be recognized at the call date (when called
prior to scheduled termination date).
 Call Price in excess of Par = Prepayment Penalty (or Acceleration Fee) = Investment Income
 BACV in excess of Par (Premium) = Loss
 Par in excess of BACV (Discount) = Gain
Currently, Schedule D-Part 4 does not include a column specific for investment income. However, per the
Annual Statement instructions, the proportionate share of investment income directly related to the
securities reported shall be included within column 20 (Bond Interest/Stock Dividends Received during
the Year). If these fees continue to be reported as investment income, staff would recommend
revisions to Schedule D-Part 4, which would show the investment income generated upon disposal
of callable bonds (i.e. the prepayment penalty) as the current reporting comingles the penalty with
bond interest. Additionally, the annual statement instructions for Schedule D-Part 4, Column 18
specifies that the realized gain (loss) on disposal should be the difference between the Consideration
received (Column 7) and the Book Adjusted Carrying Value at Disposal Date (Column 16). If a portion
of the Consideration (for the penalty/fee) is deemed to be investment income (Column 20), then
revisions to the annual statement instructions for Column 18 would be needed to clarify the
presentation of disposals of callable bonds on Schedule D-Part 4.
During review of some entities Schedule D-Part 4, which had bonds disposed of as a result of a make
whole provision; balances reported were being manipulated (i.e. consideration, column 7), so the
appropriate gain/loss was shown in column 18 (i.e. the balance that would impact IMR), and the
remainder of the schedule balances flowed (with the prepayment penalty reflected in column 20). If the
Working Group elects to continue to have these fees reported as investment income, staff would
recommend that the Working Group consider whether they are concerned with the manipulation of
this schedule and whether revisions to the Annual Statement Instructions are necessary to eliminate
this manipulation.
Gains and losses incurred at the call date are recognized and documented on Schedule D Part 4, column
18 and are subject to authoritative literature (if applicable) within SSAP No. 7—Asset Valuation Reserve
and Interest Maintenance Reserve. Per the current accounting guidance in SSAP No. 26, the gain/loss
incurred at the call date is the difference between the BACV and Par.
Option Two: Reported as realized capital gains (Penalties subject to the IMR)
If prepayment penalties and acceleration fees were recognized as a gain upon liquidation the following
accounting would be recognized when the bond is called prior to scheduled termination date:
 Call Price in excess of Par = Prepayment Penalty (or Acceleration Fee) = Gain
 BACV in excess of Par (Premium) = Loss
 Par in excess of BACV (Discount) = Gain
Ref #2015-23
Under this option, the prepayment penalty would be included with other gains and losses (BACV in
excess of Par) and would be recognized and documented on Schedule D-Part 4, Column 18. With this
change, the “Consideration” (amount received) received in disposal of a bond would flow through
existing columns in Schedule D-Part 4. However, staff would still suggest clarification revisions to
annual statement instructions.
Gains and losses incurred at the call date will be subject to the authoritative literature (if applicable)
within SSAP No. 7—Asset Valuation Reserve and Interest Maintenance Reserve. SSAP No. 7, paragraphs
2-3 state the following (only applicable text included)
2.
The IMR defers recognition of the realized capital gains and losses resulting from
changes in the general level of interest rate. These gains and losses shall be amortized into
investment income over the expected remaining life of the investments sold.
3.
The IMR and AVR shall be calculated and reported as determined per guidance in the
SSAP for the specific type of investment (e.g. SSAP No. 43R for loan-backed and structured
securities), or if not specifically stated in the respective SSAP, in accordance with the NAIC
Annual Statement Instructions for Life and Accident and Health Insurance Companies.
In general, prepayment penalties on callable bonds (including bonds with make whole call provisions) are
structured to compensate the holder of the bond as a result of unfavorable interest rate fluctuations.
Therefore, as these penalties are derived to account for interest rate fluctuations, it appears that the
penalties fall under the concept of IMR, as stated in SSAP No. 7, paragraph 2 (see above).
As noted by interested parties in their comment letter (dated 5/26/15), if the Working Group elects to
recognize prepayment penalties as realized capital gains, a new difference between GAAP and SAP will
be created requiring insurers to audit and explain this difference. Through review of GAAP and
discussions with an AICPA representative, it was identified that GAAP guidance is not specific on the
presentation of prepayment penalties, but rather focuses on when recognition shall occur. Additionally, it
was identified that there are at least two views with respect to the treatment of prepayment penalties,
interest income and gain on settlement and both are acceptable with ample footnote disclosure.
Option Three: Reported as Realized Capital Gains (Penalties Excluded from IMR Calculation)
As noted above, it appears that (at least for purposes of Schedule D-Part 4) some entities are electing to
record the prepayment penalties as realized gains and not within investment income. Under this option,
the prepayment penalty would be included with other gains and losses (BACV in excess of Par) and
would be recognized and documented on Schedule D-Part 4, Column 18. With this change, the
“Consideration” (amount received) received in disposal of a bond would flow through existing columns in
Schedule D-Part 4. However, staff would still suggest clarification revisions to annual statement
instructions.
While the reporting of prepayment penalties on Schedule D-Part 4 is consistent between Options Two and
Three, the differentiating factor under Option Three is that these penalties would be reported on Schedule
D-Part 4 as realized gains/losses, but would not be subject the IMR calculation.
Staff Review Completed by:
Josh Arpin – July 2015
Status:
August 15, 2015, the Statutory Accounting Principles (E) Working Group bifurcated agenda item 201504, with the original agenda item focusing on guidance to clarify the yield-to-worst concept for callable
Ref #2015-23
bonds, and this agenda item (Ref #2015-23) focusing on the accounting and reporting treatment of
prepayment penalties. Additionally, the Working Group moved this item to the nonsubstantive active
listing and exposed this agenda item with a request for comments on three options for the accounting and
reporting of prepayment penalties: 1) Report as investment income; 2) Report as realized capital gains
subject to IMR; and 3) Report as realized capital gains not subject to IMR.
On October 19, 2015, the Statutory Accounting Principles (E) Working Group directed staff draft
proposed revisions to the Schedule D and Annual Statement Blanks and Instructions, based on the
Working Group’s preferred accounting treatment of Investment Income.
It is anticipated that the proposed revisions will be initially presented and discussed at the Fall National
Meeting (likely to be exposed). These proposed revisions would address the following: 1) Revise SSAPs
to reflect the preferred accounting treatment (if applicable); 2) conflicting language between the SSAP
and the Annual Statement Instructions; 3) identify callable bonds (including those sold, redeemed, or
otherwise disposed) and 4) identify the amount of investment income recognized as a result of a call
provision (including make whole call). Staff highlights that the proposed revisions would ultimately go to
the Blanks (E) Working Group for consideration. However, staff proposes that the SAPWG review and
adopt the desired changes initially.
On November 19, 2015, the Statutory Accounting Principles (E) Working Group exposed revisions to
various SSAPs and reporting tools to clarify the appropriate reporting of prepayment penalties within the
investment schedules. These exposed revisions are shown throughout the “2015 Fall National Meeting
Discussion and Proposed Revisions” as illustrated below:
2015 Fall National Meeting Discussion and Proposed Revisions
In response to the Working Group direction at the Summer National Meeting, staff has proposed the
following recommendations:
Effective Date
As a result of the revisions being suggested, industry is recommending that an effective date be applied,
to assist entities in the event that these revisions would require significant system changes and possible
impact on historical IMR balances.
To determine the effective date for these revisions, as part of the recommended exposure, staff is
requesting input from industry and regulators on the timing of these revisions and the appropriate
effective date to allow entities to make any necessary changes to their systems, as well as consider
whether historical IMR balances would need to be adjusted.
Staff Note: Per discussion at the Fall National Meeting, regulator comments indicated that an effective
date would not be necessary for the following reasons: 1) the revisions to the SSAPs are only clarifying
revisions and do not change the accounting treatment of prepayment penalties as currently prescribed by
the SSAPs and 2) nonsubstantive revisions are generally effective upon adoption and the earliest this
agenda item would be adopted is Spring 2016, therefore, the regulators noted that this should provide
ample time for companies to make changes to their systems and work with their state regulators to
determine if historical IMR balances need to be adjusted.
SSAP Revisions
As detailed above, there is inconsistency in the reporting of prepayment penalties, including what portion
Ref #2015-23
of proceeds reflects the “penalty.” To clarify the amount of investment income and/or realized capital
gains/losses to be reported upon disposal of an investment, staff recommends that the Working
Group expose the following revisions to SSAPs No. 26 and 43R:
(Staff Note: Paragraph and footnote references will be updated as needed)
SSAP No. 26—Bonds:
14.
A bond may provide for a prepayment penalty or acceleration fee in the event the bond is
liquidated prior to its scheduled termination date. Such fees shall be reported as
investment income when received1.
Footnote: The amount of investment income reported is equal to the total proceeds
(consideration) received less the Par value of the investment. Any difference between the
BACV and Par at the time of disposal shall be reported as realized capital gains and
losses, subject to the authoritative literature in SSAP No. 7.
SSAP No. 43R—Loan-Backed and Structured Securities:
11.
A loan-backed or structured security may provide for a prepayment penalty or
acceleration fee in the event the investment is liquidated prior to its scheduled termination date.
These fees shall be reported as investment income when received1.
Footnote: The amount of investment income reported is equal to the total proceeds
(consideration) received less the Par value of the investment. Any difference between the
BACV and Par at the time of disposal shall be reported as realized capital gains and
losses, subject to the authoritative literature in SSAP No. 7.
Staff Note: Currently, SSAP No. 37 includes similar language with respect to the treatment to prepayment
penalties as SSAPs No. 26 and 43R. As a “Par” value is not currently presented on Schedule B-Part 3,
staff has not suggested revisions to SSAP No. 37 to clarify how the amount of investment income and
realized gain/loss is calculated. However, based on the direction of the Working Group regarding the
proposed revisions to Schedule D-Part 3 (see below), staff request comments on potential language (if
any) that should be added to SSAP No. 37.
Code Column/Description
The Investment Reporting (E) Subgroup is currently having ongoing discussions regarding potential
revisions to the presentation and reporting on Schedule D. One of the topics being discussed is revisions
to the code and bond characteristics columns (columns 3 and 5 on Schedule D-Part 1). These revisions
would assist in identifying specific features included within the bond, including callable features (such as
a make whole call provision). Staff will continue to monitor the actions taken by this subgroup and the
Blanks (E) Working Group in considering any proposed revisions to Annual Statement Blanks and
Instructions.
At this time, staff recommends that the Working Group include in the blanks proposal a revision to
Schedule D – Part 1, Part 4 and Part 5, to add (or revise existing) codes and bond characteristic
identifiers in order to aid regulators in identifying callable features, including investments with
make whole call provisions.
Staff Note: Refer to Annual Statement Instructions section below for additional revisions associated with
these revisions.
Ref #2015-23
Investment Income – Electronic Only Column
Currently, Schedule D-Part 4 does not include a column specific for investment income. However, per the
Annual Statement instructions, the proportionate share of investment income directly related to the
securities reported shall be included within column 20 (Bond Interest/Stock Dividends Received during
the Year). As the prepayment penalty (i.e. amount recognized in investment income) is not easily
identifiable and is comingled with the security’s related bond interest, staff recommends revisions to
add an electronic-only column, which would show the investment income generated upon early
disposal of callable bonds/mortgage loans/loan backed structured securities (i.e. the prepayment
penalty) to the following schedules:
 Schedule D—Part 4: Long Term Bonds and Stocks Sold, Redeemed or Otherwise Disposed
Of During Current Year
 Schedule D—Part 5: Long Term Bonds and Stocks Acquired During the Year and Fully
Disposed of During Current Year
 Schedule B—Part 3: Mortgage Loans Disposed, Transferred or Repaid During the Current
Year
Staff Note: Refer to Annual Statement Instructions section below for additional revisions associated with
the inclusion of an electronic only column.
Annual Statement Blanks and Instructions
Staff proposed revisions address the following:



Revisions to the Code and Bond Characteristics columns to identify callable features, including
investments with make whole call provisions.
The creation of an electronic only column, which would capture the investment income
recognized as a result of prepayment penalties.
Clarify the amounts to be reported as investment income and realized capital gains/losses on
applicable investment schedules
Schedule D—Part 1
Staff Note: the assignment of each code would be at the discretion of the Blanks (E) Working Group.
Column 3
–
Code
Enter “*” in this column for all Class One Bond Mutual Funds.
Enter “#” in this column for all Exchange Traded Funds.
Enter “@” in this column for all Principal STRIP Bonds or other zero coupon bonds.
Enter “$” in this column for Certificates of Deposit under the FDIC limit.
Enter “&” in this column for TBA (To Be Announced) securities.
Enter “^” in this column for all assets that are bifurcated between the insulated
separate account filing and the non-insulated separate account filing.
Enter “_” in this column for all investments containing callable features (including
those with make whole call provisions).
Column 5
–
Bond Characteristics
Ref #2015-23
If bonds have one or more of the following characteristics, then list the appropriate
number(s). If none of the characteristics apply, then leave the column blank.
1.
Call Option.
2.
Securities (exclude items reported in 1) where the issuer has the right to vary
the timing of principal or coupon payments, for example, such mortgagebacked and sinking fund securities that do not have a fixed payment schedule.
3.
Variable coupon securities, where the issuer has the right to vary the amount
of periodic payments (include: equity-linked coupons, exclude: floating rate
notes with an unleveraged coupon, linked directly to an interest rate index).
4.
Terms that may result in principal (or initial investment) not being repaid in full
(include: Catastrophe bonds, IOs).
5.
Payments linked to foreign exchange rates (exclude: bonds simply
denominated in a currency other than US dollars).
6.
Securities where payments are determined by the performance of a credit
other than that of the issuer (include: credit-linked notes).
7.
Mandatory Convertible.
8.
Other types of options controlled by the issuer (exclude items reported in 1 –
7).
9.
Securities containing Make-Whole Call Provisions
Schedule D—Part 4
Staff Note: As detailed above, staff research identified manipulation of the balances reported in the
consideration column (column 7) in order for the remainder of the schedule balances to flow. The
balance in this column should equal the full amount of proceeds received.
Unlike Schedule D-Part 1, Part 4 does not currently contain code or bond characteristics columns. As the
purpose of this schedule is to provide a detailed listing of all securities that were sold/disposed of during
the current reporting year (that were owned as of the beginning of the year), staff believes that it would be
beneficial to regulators to identify, through the addition of a code column, the reason/purpose for the
security being reported on this schedule. Staff’s proposed code column, would use the existing examples
outlined at the beginning of the schedule’s instructions, with the addition of codes to specifically address
callable characteristics (including make whole call provisions). This information would likely be most
beneficial if included as a column on the face of the schedule, however, staff defers to the Working Group
on the presentation of this column (either on the face or as an electronic only column).
Proposed Revision to Include a Code Column (the assignment of each code would be at the discretion of
the Blanks (E) Working Group):
Column _
–
Code
Enter “_” in this column for pay downs of securities still owned (including CMO
prepayments).
Enter “_” in this column for subsequent partial sales of investment issues still owned.
Enter “_” in this column for reallocation of the cost basis of an already owned stock to
the cost basis of a new stock received as a dividend (e.g., spin off).
Enter “_” in this column for any decreases in the investments in SCA companies that
adjust the cost basis, not including other-than-temporary impairments alone (e.g.,
subsequent return of capital from investments in SCA companies valued using the
equity method).
Ref #2015-23
Enter “_” in this column for called securities (including those called under a make
whole call provision).
New Electronic Only Column:
Investment Income Reported as a Result of Prepayment Penalties
For those securities sold, redeemed or otherwise disposed which generated
investment income as a result of a prepayment penalty, include the proportionate
share of investment income included within Column 20 of this schedule.
Column 18
–
Realized Gain (Loss) on Disposal
This should be the difference between the Consideration column amount and the
Book/Adjusted Carrying Value at Disposal Date, excluding any portion that is
attributable to foreign exchange differences.
For securities sold, redeemed or otherwise disposed of, which generate investment
income as a result of a prepayment penalty; the amount of realized gain (loss)
reported is equal to the BACV at the Disposal Date (column 16) less the Par value of
the investment (column 8)
For Class One Bond Mutual Funds and Exchange Traded Funds, enter the difference
between the consideration, Column 7 and aggregate cost Column 9 at date of sale.
Column 20
–
Bond Interest/Stock Dividends Received During Year
For Mutual Funds (including Class One Bond Mutual Funds and Exchange Traded
Funds), enter the amount of distributions received in cash or reinvested in additional
shares.
Include:
The proportionate share of investment income directly related to
the securities reported in this schedule.
For securities sold, redeemed or otherwise disposed of, which generate investment
income as a result of a prepayment penalty; the amount of investment income
reported is equal to the total consideration received (column 7) less the Par value of
the investment (column 8)
Schedule D—Part 5
As detailed in Part 4 above, Staff also recommends similar revisions to Part 5 regarding the addition of a
code column. This schedule provides a detailed listing of all securities that were sold/disposed of during
the current reporting year (that were acquired during the current reporting year),
Proposed Revision to Include a Code Column (the assignment of each code would be at the discretion of
the Blanks (E) Working Group):
Column _
–
Code
Enter “_” in this column for pay downs of securities still owned (including CMO
prepayments).
Enter “_” in this column for subsequent partial sales of investment issues still owned.
Enter “_” in this column for reallocation of the cost basis of an already owned stock to
the cost basis of a new stock received as a dividend (e.g., spin off).
Ref #2015-23
Enter “_” in this column for any decreases in the investments in SCA companies that
adjust the cost basis, not including other-than-temporary impairments alone (e.g.,
subsequent return of capital from investments in SCA companies valued using the
equity method).
Enter “_” in this column for called securities (including those called under a make
whole call provision)
Column 18
–
Realized Gain (Loss) on Disposal
This should be the difference between the Consideration column amount and the
Book/Adjusted Carrying Value at Disposal Date, excluding any portion that is
attributable to foreign exchange differences.
For securities sold, redeemed or otherwise disposed of, which generate investment
income as a result of a prepayment penalty; the amount of realized gain (loss)
reported is equal to the BACV at the Disposal Date (column 11) less the Par value of
the investment (column 8)
Column 20
–
Interest and Dividends Received During Year
For Mutual Funds (including Class One Bond Mutual Funds and Exchange Traded
Funds), enter the amount of distributions received in cash or reinvested in additional
shares.
Include:
The proportionate share of investment income directly related to
the securities reported in this schedule.
Report amounts net of foreign withholding tax.
For securities sold, redeemed or otherwise disposed of, which generate investment
income as a result of a prepayment penalty; the amount of investment income
reported is equal to the total consideration received (column 10) less the Par value of
the investment (column 8)
New Electronic Only Column:
Investment Income Reported as a Result of Prepayment Penalties
For those securities sold, redeemed or otherwise disposed which generated
investment income as a result of a prepayment penalty, include the proportionate
share of investment income included within Column 20 of this schedule.
Schedule B—Part 3
New Electronic Only Column:
Investment Income Reported as a Result of Prepayment Penalties
If a mortgage loan liquidated prior to its scheduled termination date provides for a
prepayment penalty or acceleration fee, report the portion of proceeds received as a
result of this penalty (i.e. the investment income).
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Fall\NM Exposures\15-23 - Prepayment Penalties and
Presentation of Callable Bonds - Bifurication of Agenda Item 2015-04.docx