Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

EXCEPTIONS TO THE RULE FOR CLASSIFICATION AS HELD-TO-MATURITY

Sales before maturity that do not “taint”

Sale or transfer of bonds under held-to-maturity is accepted when there is a change in circumstances leading to the change in the intention to hold the bonds until maturity. These exceptions are given in the relevant accounting standard both under US GAAP as well as IFRS and are broadly along the following lines:

a) A significant deterioration in the issuer’s creditworthiness. If there is evidence that a financial asset is impaired, the deterioration in creditworthiness is often regarded as significant. This deterioration must be actual in nature and not mere speculation. This deterioration must be due to the issuer’s inability to pay on maturity or the impairment of the fixed instrument asset.

b) A change in tax law that eliminates or significantly reduces the tax-exempt status of interest on the held-to-maturity investment. However, this does not include a change in tax law that revises the marginal tax rates applicable to interest income.

c) A major business combination or major disposition (such as a sale of a segment) that necessitates the sale or transfer of held-to-maturity investments to maintain the entity’s existing interest rate risk position or credit risk policy. In this case, although the business combination is an event within the entity’s control, the changes to its investment portfolio to maintain an interest rate risk position or credit risk policy may be consequential ...