FASB approves moving fair value, impairment proposals to final FSPs

Summary: The FASB cleared three proposed FSPs that will amend the guidance for determining the fair value of an instrument that has stopped trading in an open market, applying impairment tests to troubled assets, and disclosing information to investors about the financial instruments on an entity's balance sheet.

The five members of the FASB emerged from the fishbowl of their April 2, 2009, meeting with their unity intact. The board's reputation is another matter. In a decision harshly criticized by investors, the FASB agreed to give financial institutions wider latitude in applying fair value measurements to troubled assets and the flexibility to enter a loss from an asset that has been written down on the balance sheet instead of the income statement. In return, statement preparers will have to provide investors with more detailed disclosures on their use of fair value accounting for financial instruments, and they'll have to do it on a quarterly basis instead of annual.

The FASB agreed to move to final guidance the proposals in:

Russell Golden, technical director for the FASB's research staff, said preballot drafts would be ready for the board by the second week of April. The final versions of the FSPs will be effective for reporting periods ending on or after June 15, 2009, although early adoption will be permitted under some conditions and can be applied for periods ending on or after March 15.

Any entity applying FSP No. FAS 107-b and APB 28-a, for its first quarter 10-Q filing will also have to follow the guidance in FSP No. FAS 157-e and FSP No. FAS 115-a, FAS 124-a, and EITF 99-20-b. In addition, any company early adopting FSP No. FAS 157-e will also have to follow FSP No. FAS 115-a, FAS 124-a, and EITF 99-20-b. The reverse is also true. But entities adopting FSP No. FAS 115-a, FAS 124-a, and EITF 99-20-b and FSP No. FAS 157-e will not have to apply FSP No. FAS 107-b and APB 28-a. The FASB members made this exception because of their concern about the difficulty some entities would have in following the extensive disclosures that will be incorporated into the final form of FSP No. FAS 107-b and APB 28-a.

Board members were clearly troubled by the complexity of the extensive changes they were implementing in such a short time. “I don't think we have a rational basis to argue that anyone can do this well for the first quarter, period—any of it,” said Thomas Linsmeier.

FSP No. FAS 157-e provides instructions for making fair value measurements in accordance with the guidance in SFAS No. 157, Fair Value Measurements, (FASB ASC 820), when a market has disappeared or the seller is forced to sell a security, the FASB said. The FASB said it is attempting to provide greater consistency in the accounting for and presentation of impairment losses on troubled securities in its proposed changes in FSP No. FAS 115-a, FAS 124-a, and EITF 99-20-b.

FSP No. FAS 107-b and APB 28-a proposes amending SFAS No. 107, Disclosures About Fair Value of Financial Instruments, (FASB ASC 825-10) and Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, (FASB ASC 270-10) with a requirement for quarterly instead of annual disclosures about the fair value of financial instruments.

FSP No. FAS 107-b and APB 28-a was first issued as Proposed FSP No. FAS 107-a, Disclosures about Certain Financial Assets: An Amendment of FASB Statement No. 107, but the FASB modified the original version in response to criticism about the required disclosures. The final version of the FSP will incorporate a second round of revised disclosures based on feedback the FASB received from investor groups.

The pending changes to the accounting literature stem from the FASB’s financial crisis project, although FSP No. FAS 157-e, and FSP No. FAS 115-a, FAS 124-a, and EITF 99-20-b, were proposed following a March 12 House subcommittee hearing during which FASB Chairman Robert Herz was sharply criticized for not moving more quickly to amend the rules for fair value accounting.

The mostly unfavorable publicity that has been directed at the FASB since the hearing clearly registered with board members. Most of the more than 650 comment letters submitted on the three proposals came from depository institutions that favored the bulk of the changes. But investor groups were bitterly critical and accused the FASB of sacrificing its independence by appeasing the members of Congress that wanted the changes. The criticism wasn't only coming from investor groups. An April 1 letter from the National Association of State Boards of Accountancy (NASBA) said in reference to Proposed FSP No. FAS 157-e, “The change proposed in this exposure draft may diminish the relevancy of financial reporting and the confidence in the capital markets that has been the strength of the U.S. globally.” The NASBA letter also said that while it was understandable that Congress had an interest in sound financial reporting, the association's members hoped that the FASB's actions would persuade members of Congress to relax their pressure. A March 31 letter from mutual fund distributor Vanguard Group Inc., while not referring directly to the House hearing or the political pressure being brought to bear upon the FASB, opposed the proposed change to SFAS No. 157 because it “would require companies to replace objective, verifiable valuation inputs with subjective judgment and undisclosed methodologies for extended periods of time.”

In February, John Brennan the chairman of the Vanguard Group, was named as chairman of the FASB's parent, the Financial Accounting Foundation. In a news conference following the FASB meeting, FAF president Teresa Polley said that the foundation's trustees met on March 16, the same day the FASB first considered the proposals it was drafting in response to the pressure from Congress, and that they supported the FASB's actions. In response to a question, Polley said the trustees did not take a formal vote, and it was not clear if any dissented. But clearly, the unusual pressure being brought to bear on the FASB registered with board members.

As the discussion on the three proposed FSPs wound down, Lawrence Smith said the board would continue to review the recommendations from constituents, including investors. In addition, the FASB's research staff, per its usual process, planned to conduct a post implementation review of the changes and report back to the board. “A lot of us went through a lot of soul searching to get to these decisions, and they were not easy,” Smith said. “It’s important that people understand that we all put a lot of effort into reviewing the comment letters.”

The FASB's disagreements with the bankers that sought the changes may be far from over. Following the board's decisions, the American Bankers Association said it was “pleased that the FASB has now taken steps to improve the accounting for other than temporary impairment, which is generally agreed to have been problematic for many years’ earnings.”

Ominously, the ABA statement added that it was “disappointed that FASB is still requiring market losses to be recorded for held-to-maturity securities. To prevent further confusion as to the nature of these losses, it will be important for FASB to consider this during the next phase of its project on financial instruments.”