The Financial Accounting Standards Board has provided new flexibility to allow banks and other financial institutions to reprice their assets during the credit crisis by amending its standard on fair value measurements.The FASB Staff Position clarifies the application of FASB Statement No. 157 in an inactive market and provides an illustrative example to demonstrate how the fair value of a financial asset is determined when the market for that asset is inactive.

At an October 10 meeting, FASB considered the proposed amendment, which it had put out for comment on Oct. 2 on an accelerated schedule. FASB said that it received over 100 comment letters in just a week's time, and at the meeting the board made some modifications to the proposed staff position and planned to quickly issue it.

Both FASB and the Securities and Exchange Commission have come under pressure to suspend fair value and mark-to-market accounting rules altogether, as some critics blame the rules for causing or exacerbating the credit crisis. A provision in the financial rescue bill required the SEC to conduct a study of mark-to-market rules and their possible affect on the crisis.

The SEC has commenced work on the study, which it plans to issue by Jan. 2, 2009.

Last month, Edward Yingling, president and chief executive of the American Bankers Association, sent a letter to SEC Chairman Christopher Cox demanding that the regulator override the board's guidance on fair value accounting.

Yingling argued that the FASB guidance is "too narrow and too complex to be used by either large or small banks."

"Under current exceptional circumstances," he wrote, "financial institutions should be allowed to value their assets consistently with risk-of-default assumptions, rather than immediate market value, which in illiquid markets may be no longer appropriate."

The ABA wants the SEC to override FASB's guidance "and replace it with guidance that clarifies that fair value in an illiquid market does not include forced or distressed sales." The group also wants the commission to provide guidance on "other than temporary impairments" and to suspend the proposed guidance on accounting for securitizations.

Yingling wrote that the SEC should "suspend work by accounting standards-setters on any projects that would require fair value in any future accounting standards pending congressional review of the [SEC] study."

On the heels of Yingling's letter, the Center for Audit Quality, the CFA Institute, the Council of Institutional Investors and the Consumer Federation of America wrote to the SEC opposing demands for it to override FASB's rules on fair value.

FASB spokesperson Christine Klimek said that the staff analyzed all the comment letters and the board's recommendations: "The board was in favor of the staff's recommendations and the FSP will reflect that."

Among the suggestions received by the board, the staff had recommended ways to make the illustrative model clearer, she noted.

For now, the FASB guidance leaves fair value in place, though. "Fair value is still here," said Klimek. "We're just providing more guidance on how to value assets in a non-active market."

The American Institute of CPAs was one of the groups that commented on the proposal.

Jay Hanson, chair of the AICPA's Accounting Standards Executive Committee, said that the committee supported FASB's proposed guidance about how to apply FASB 157, and believes that it will be helpful in practice. He noted that preparers and auditors may need additional guidance for Level 3 measurements (where valuations must be determined by non-observable assumptions), and recommended that FASB clarify that the contractual cash flows used in the example are not appropriate for purposes of determining whether there is impairment under EITF No. 99-20.


Separately, FASB issued two distinct but related drafts proposing standards on going concerns and subsequent events.

The proposed statement on going concerns would require that management of a reporting entity consider all available information about the future, which is at least, but not limited to, 12 months from the end of the reporting period, when assessing whether a going-concern assumption is appropriate.

Prior to the proposal, the time horizon for the going-concern assessment was limited to one year beyond the date of the statements. The proposal also would require disclosures when either the statements are not prepared on a going-concern basis, or there is substantial doubt as to an entity's ability to continue as a going concern. FASB believes that this guidance belongs in the accounting literature because it is management's responsibility to assess the ongoing viability of the entity.

The proposed statement on subsequent events establishes general standards of accounting for and disclosure of events that occur subsequent to the balance sheet due date, but before financial statements are issued or available to be issued. The board added the notion of "available to be issued" to consider situations in which statements may not be widely distributed after they are prepared, as may be the case with some nonpublic entities.

The proposed statement also would require disclosure of the date through which management has evaluated subsequent events and the basis for that date - that is, whether it represents the date that the financial statements were issued or the date that they were available to be issued. That disclosure would alert all statement users that management has not evaluated subsequent events after that date.

FASB is asking for comments on the proposals to be sent by Dec. 8, 2008.

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