January 17, 1992
TO: ACCOUNTING/TREASURERS COMMITTEE NO. 1-92
INDEPENDENT ACCOUNTANTS ADVISORY GROUP
RE: ACCOUNTING FOR INVESTMENTS WITH PREPAYMENT RISK
__________________________________________________________
Attached is the Institute's comment letter to the FASB
regarding Proposed Statement of Financial Accounting Standards,
Accounting for Investments with Prepayment Risk (the "ED").
The ED would require under certain conditions that
cumulative retroactive adjustments be made to carrrying amounts
and income, reflecting material changes in prepayment estimates
(the "retrospective method") for instruments with prepayment
risk. The ED applies to investments carried at market value to
the extent that interest income on those investments is
recognized by the effective interest method. Thus, in its
current form, the ED appears not to affect accounting for GNMAs
but may affect accounting for many callable debt instruments held
by investment companies.
The Institute's letter objects to the retrospective method
as conceptually flawed and impracticable and recommends that the
ED be revised to exclude from its scope investments reported at
market value.
We will keep you informed of developments.
DONALD J. BOTELER
Assistant Vice President -
Operations