What is the main change Bank of America is implementing?

Bank of America is changing its accounting method for how it handles premiums and discounts on certain debt securities. Instead of the old 'prepayment method,' it's moving to the 'contractual method' for securities valued at fair value and held-to-maturity.

Why is Bank of America making this accounting change?

The primary reasons are to reduce volatility in its reported net interest income, which was sensitive to interest rate changes under the old method, and to make its financial reporting more comparable to that of its industry peers. The old method required non-GAAP disclosures to bridge these differences.

Will this change affect Bank of America's reported capital ratios?

No, the company will not restate previously filed capital ratios. The cumulative impact of this accounting change on capital ratios was considered insignificant according to bank regulatory rules.

How will this affect future financial reporting?

Going forward, investors can expect a more stable presentation of net interest income, with less volatility driven by interest rate movements. The company also anticipates no longer needing to provide certain non-GAAP disclosures related to this accounting treatment in its earnings materials.

BANK OF AMERICA CORP /DE/ 8-K: Regulation FD

Summary

Bank of America Corporation (BAC) announced a change in its accounting method for the amortization of premiums and accretion of discounts on certain debt securities. Effective July 1, 2016, the company transitioned from the "prepayment method" to the "contractual method." The prepayment method, which factored in estimated principal prepayments and could lead to significant volatility in net interest income due to interest rate fluctuations, is being replaced by the contractual method. The contractual method amortizes premiums and discounts at a constant effective yield based on contractual payment terms, thus reducing volatility and aligning BAC with industry peers. This change is expected to eliminate the need for certain non-GAAP disclosures previously used to reconcile BAC's net interest income with those of its competitors. While BAC will not restate previously filed capital ratios, financial information for prior periods has been updated to reflect this new accounting treatment. This proactive accounting adjustment aims to enhance comparability and transparency for investors by providing a more stable and consistent view of net interest income.

Key Highlights

1Change in accounting method for debt securities: BAC is shifting from the "prepayment method" to the "contractual method" for amortizing premiums and accreting discounts on certain debt securities.
2Effective date: The change is effective as of July 1, 2016.
3Reduced earnings volatility: The contractual method is expected to significantly reduce volatility in net interest income and earnings, which was a characteristic of the previous prepayment method, particularly in response to interest rate changes.
4Enhanced comparability with peers: The adoption of the contractual method aligns BAC's accounting practices with those of its industry peers, removing a key reason for prior non-GAAP disclosures.
5Elimination of non-GAAP disclosures: The company anticipates no longer needing to provide certain non-GAAP supplemental information in future earnings presentations due to this accounting change.
6No restatement of capital ratios: BAC will not restate previously filed capital ratios, as the cumulative impact of the change on these ratios was deemed insignificant.
7Prior period updates: Financial information for all prior periods presented has been updated to reflect this accounting method change.

BANK OF AMERICA CORP /DE/ 8-K Report, Regulation FD Disclosure (Oct 4, 2016)

Summary

Key Highlights

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