Five trade groups representing banks, financial service firms and insurance companies sent a joint letter to Congress registering continued displeasure with fair value and mark-to-market accounting and impairment rules, despite recent changes.
The letter, addressed to members of the House Financial Services Committee, questioned the relevance of mark-to-market accounting for the traditional banking system and complained of the large write-downs shown by the application of other-than-temporary-impairment guidance. The signers included the American Bankers Association, the Financial Services Roundtable, the American Council of Life Insurance, the American Insurance Association and the Council of Federal Home Loan Banks.
Last month, FASB revised mark-to-market and fair value accounting rules under pressure from banking interests and Congress after a contentious committee hearing (see FASB Compromises on Fair Value).
The committee permitted FASB to reach its own conclusions about how to approach the mark-to-market problems, and your efforts created a sense of urgency for improvements that were sorely needed, said the trade groups. We thank you for that, as we believe that the changes that were made by FASB to the accounting for 'other-than-temporary impairment' represent a major improvement in financial reporting for OTTI.
However, the groups claimed the revisions were not extensive enough. Although FASB acted expeditiously as the committee requested, the changes only scratched the surface, said the letter. For example, OTTI continues to result in higher losses for U.S. companies versus companies that follow international accounting standards, and may unintentionally increase the number of bonds that become subject to an OTTI charge. Additionally, while the other changes made by FASB on MTM provide more specific guidance, which is useful for more consistent application of the rules, they do not focus on the heart of the problem: mark-to-market does not provide the most relevant measurement basis for many types of transactions.
The ABA and the other groups also expressed dismay over FASBs recent staff position reaffirming the definition of fair value.
Although our associations have a number of concerns about MTM, the most important improvement that we believe still needs to be made is the definition of fair value, they said in the letter. In practice, the application of FASBs rule defining fair value as exit price gives no consideration to what price a seller is willing to accept, and therefore results in a downward bias in reported values. Fair value should be defined as a willing buyer and willing seller in an arms-length transaction that is not a forced sale.
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