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Bank Accounting Practices
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

Section 1.11 of Investment Securities Regulation of the Comptroller of the Currency provides that when an investment security is purchased at a premium over par, the bank shall charge off the entire premium at the time of purchase or provide for amortization of the premium so that it shall be entirely extinguished at or before maturity of the security.

Section 1.10 of the Comptroller's regulation provides that when a bank purchases an investment security convertible into stock or with stock purchase warrants attached, the bank shall at time of purchase write down the cost of the security to investment value of the security considered independently of the conversion feature or attached stock purchase warrants.  Giving effect to such write-down, if investment value results in a premium still, Section 1.11 of the Investment Securities Regulation then applies, requiring a program of amortization of such remaining portion of the original total premium, so that it shall be entirely extinguished at or before maturity of the security.

The Comptroller's ruling number 7550 explicitly provides that discount (accretion of discount) on any bond, including a public of investment security, whether arising upon original issue or purchase in the market, may be accrued if there is concurrent accrual of income tax on such discount.  The Comptroller of the Currency furnishes "Report of Income and Dividends" forms and instructions for their preparation and filing annually for the 12-month period ending December 31st (Comptroller's Regulations, 12 CFR 4.11(3)).

For state member banks of the Federal Reserve system, and for other state banks insured by the Federal Deposit Insurance Corporation, Regulation F of the Board of Governors of the Federal Reserve System and companion regulation by the Federal Deposit Insurance Corporation specify that securities accounts, for both the statement of condition and income statement, shall reflect cost adjusted for amortization of premium and, at the option of the bank, for accretion of discount.  If the reporting bank does not accrete bond discount, the amount that could have been accreted shall be set forth in footnote.

It is the position of the Board of Governors of the Federal Reserve System that a member state bank may not lawfully invest in a convertible security whose price exceeds, by more than an insignificant amount, the investment value of the obligation, considered independently of the conversion feature.


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