Statutory Treatment of Prepaid Penalties/Acceleration Fees

Submitted by Cynthia Braman on Tue, 09/05/2017 - 11:11am

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By Barry Cohen

Entering prepaid penalties/acceleration feesSSAP 26 Bonds and SSAP 43R Loan-Backed and Structured Securities were revised to clarify the recognition and calculation of prepayment penalties/acceleration fees received on bonds called before maturity. These fees are to be reported as investment income and calculated as the difference between the total proceeds received and the bond’s par value. Any difference between the bonds book value at disposal and its par value is reported as realized capital gain/(loss).

The following example identifies the amounts recognized in Schedule D - Part 4 as investment income and realized capital gain, respectively, for a bond called at 104.5%.

Description Proceeds
(1)
Par Value
(2)
BACV at Disposal Date
(3)
Investment Income Received
(1) - (2)
Realized Gain (Loss) on Disposal
(2) - (3)
XYZ Company 2,926,000 2,800,000 2,794,163 126,000 5,837

Prepayment penalties/acceleration fees are disclosed in Quarterly Note 5N and 2017 Annual Note 5R.

 

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