Subsequent Measurement of Held-to-Maturity Debt Securities

✦ Held-to-maturity (HTM) debt securities are measured at amortized cost, reflecting the intention and ability to hold them until maturity.

✦ Under ASC 320, changes in fair value are not recognized in income or equity unless there is an impairment.

✦ Interest income is recognized using the effective interest method, adjusted for premiums or discounts on acquisition.

✦ Proper classification and measurement require ongoing assessment of credit risk, impairment, and business intent.

1. Definition of Held-to-Maturity Securities

✦ HTM securities are debt instruments purchased with the positive intent and ability to hold until contractual maturity.

✦ These exclude equity securities and any debt investments the entity might sell in response to changes in interest rates, liquidity needs, or risk.

✦ Common examples:

 • Treasury bonds

 • Corporate bonds

 • Municipal bonds held to maturity

2. Initial Recognition and Classification

✦ HTM securities are initially recorded at cost, including transaction fees.

✦ At acquisition, if purchased at a premium or discount, use the effective interest method to amortize over the life of the instrument.

✦ Reclassification out of HTM is rare and restricted—doing so may taint the HTM portfolio under ASC 320-10-25-6.

3. Subsequent Measurement — Amortized Cost

✦ After initial recognition, HTM securities are measured at amortized cost.

✦ Premiums are amortized as a reduction of interest income.

✦ Discounts are amortized as an addition to interest income.

Example:

• Face value = $100,000

• Purchase price = $95,000 (discount)

• Maturity = 5 years, stated interest rate = 5 %

→ Amortize $5,000 over 5 years using the effective yield.

4. Journal Entry — Interest Income and Amortization

Year 1 interest income on discounted HTM bond:

debit Cash – $5,000

debit HTM Investment – $1,000

 credit Interest Income – $6,000

✦ Reflects cash received and amortization of the discount into income.

5. Impairment Considerations

✦ Under ASC 326 (CECL model), entities must assess expected credit losses for HTM securities at each reporting date.

✦ Recognize impairment through an allowance for credit losses (AFCL) rather than a direct write-down.

✦ Estimate based on historical loss data, macroeconomic trends, and borrower-specific risk.

Entry (if impairment is identified):

debit Credit Loss Expense – $2,000

 credit Allowance for Credit Losses – $2,000

6. Balance Sheet Presentation

✦ Reported as:

 • Amortized cost less allowance for credit losses

✦ Disclose separately from trading and available-for-sale (AFS) securities.

✦ HTM securities are typically noncurrent unless maturing within 12 months.

7. Disclosure Requirements

✦ Description of HTM securities and valuation policies

✦ Amortized cost, gross unamortized premium/discount, and net carrying amount

✦ Allowance for credit losses and changes during the period

✦ Maturities by year for next five years and thereafter

8. IFRS Comparison (IFRS 9)

Topic	US GAAP (ASC 320 / 326)	IFRS (IFRS 9)
Measurement basis	Amortized cost	Amortized cost
Credit loss model	CECL (expected loss)	Expected credit loss model
Impairment recognition	Allowance method	Same
Tainting rules	Strict	Less restrictive

9. Common Errors

✦ Misclassifying a debt security as HTM without intent and ability to hold

✦ Failing to apply the CECL model to assess expected credit losses

✦ Ignoring amortization of premium or discount over time

✦ Reclassifying HTM securities without documenting justification

✦ Omitting required disclosures of maturity schedules and impairment assumptions