Tax News

CCH (cch.taxgroup.com) reports:

  The Financial Accounting Standards Board (FAS acted on April 2 to modify the fair value ("mark to market") and other-than-temporary-impairment rules. The hard-hit U.S. banking and financial services sector immediately welcomed the news. The board is expected to take final action in the near future.

Quick Action

  The FASB was under great pressure from Congress to act quickly, Jay D. Hanson, chair, Accounting Standards Executive Committee, American Institute of Certified Public Accountants (AICPA) told CCH. At a hearing on March 12, members of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises were very critical of the fair value measurement rule and put pressure on the FASB to modify and clarify the rule by the beginning of April, or face legislation that would modify or suspend it altogether. This echoes past calls by lawmakers to suspend fair value accounting (TAXDAY, 2008/10/02, M.1). In mid-March, FASB chair Frank Herzog told Congress that the FASB would issue a proposal within three weeks.

Fair Value Measurements

  The controversial fair value measurement rule is explained in FASB Statement 157, Fair Value Measurements (FAS 157), which establishes a definition of fair value and a framework for measuring fair value under U.S. generally accepted accounting principles (GAAP). Accounting standards generally require that financial instruments be measured on a financial institution's balance sheet at fair value. In the current global economic crisis, these standards have required banks and other financial institutions to write down certain assets to very low market levels, prompting some to blame fair value accounting for bank and financial institution failures and the worsening of the financial crisis.

Relaxed Rules

  On March 17, the FASB issued a proposed change to the fair value rule and solicited comments, which were due by April 1. On April 2, the FASB met and discussed those comment letters and decided to make significant modifications to the fair value accounting rule. The changes allow officials at companies, including banks and other financial institutions, to use their judgment to a greater extent in determining the fair value of their investments and to avoid writing down losses on impaired investments, including collateralized debt obligations (CDOs).

  The new rules will also require reporting companies to provide increased disclosures on their valuation techniques and any changes in such techniques. The new rule will include additional factors for determining whether a market is inactive and permit an entity to base its conclusion about whether a transaction is orderly on the weight of the evidence.

  The Board's action addressed proposed FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, and proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments.

  "Today's action relates to how to measure value when the market is not active and also to the concept of accounting for other-than-temporary impairment," Hanson explained. The FASB's original proposal relating to measurement when the market is not active resulted in significant "push back," he noted.

Other-than-Temporary Impairment

  In a related decision, the FASB decided that a change in existing guidance for determining whether the impairment in a security is other than temporary should be limited to debt securities. This decision also permits an entity, when valuing a debt security, to assert that it does not have the intent to sell the security and it is more likely that not that it will not have to sell the security before recovery of its cost basis. These changes give reporting entities more flexibility in valuation.

  "The concept of other-than-temporary impairment is difficult to conceptualize," Hanson explained. In today's market there is some portion of that decline in value that is related to market uncertainty and the general credit-worthiness of the company.

  "Under the FASB's action, only the part that relates to credit has to go through the income statement," Hanson said. Additionally, to the extent that a bank has already taken some losses, they can do an accumulated catch-up adjustment, he pointed out.

Effective Date

  The relaxed rules take effect for interim and annual financial statement reporting periods ending after June 15, 2009, but companies are permitted to adopt these new rules for interim and annual periods ending after March 15, 2009. The relaxed rules can be applied prospectively only and cannot be adopted retroactively.

Reaction

  The banking sector reacted favorably to the development. "Today's decision should improve information for investors by providing more-accurate estimates of market values," Edward Yingling, president and CEO of the American Bankers Association, said in a written statement. Karen Thomas, executive vice president of government relations, Independent Community Bankers Association (ICBA), reacted similarly. "Community banks support better other-than-temporary-impairment guidance both as preparers and users of financial statements," Thomas said in a written statement. The ICBA also submitted comments to the FASB.

  Barry C. Melancon, AICPA president and CEO, acknowledged that not all stakeholders will be happy with the outcome. "All participants in the financial reporting system have an obligation to move forward and provide the most transparent and reliable information on hard-to-value assets so that our capital markets can use that information to allocate capital efficiently," Melancon said in a written statement.

Final FSPs

  FASB staff is preparing a draft of the final FSPs. The Board is expected to vote soon by written ballot.

  By Mary Taylor and George L. Yaksick, Jr., CCH News Staff

ABA Welcomes FASB Guidance on Mark-to-Market Accounting and Impairment Rules

AICPA Accounting Standards Executive Committee Comment Letter to FASB

ICBA Comment Letter to FASB

AICPA Statement on Today's FASB Action on Fair Value

Summary of Board Decisions: Determining Whether a Market Is Not Active and a Transaction Is Not Distressed

Summary of Board Decisions: Recognition and Presentation of Other-Than-Temporary Impairments (OTTI)