Accounting experts and industry organizations alternately praised and panned the Financial Accounting Standards Boards decision to loosen the standards for fair value and mark-to-market accounting.
The board voted Thursday to approve two newly introduced FASB Staff Positions that give banks and other financial institutions more flexibility in how they can value illiquid assets such as mortgage-backed securities and account for other than temporary impairments in the asset value (see FASB Compromises on Fair Value). FASB gave constituents only about two weeks to comment on the proposals after FASB Chairman Robert Herz was grilled by a House Financial Services subcommittee and pressured to reform mark-to-market accounting rules.
It would have been good to have a longer comment period, said Keith Peterka, senior manager in the professional services group at CBIZ/Mayer Hoffman McCann. We thought [FAS] 157 was a very well thought out, principles-based standard. We understand people struggled with it and they probably needed more guidance, but there was incredible political pressure on the FASB to make changes.
Mike Zuppone, a former SEC branch chief and current chair of the Securities and Capital Markets Practice at the international law firm Paul Hastings, was optimistic about banks benefiting from the adjusted standards. My sense is that this development will foster transparency and will cause banks to take a hard look at their existing portfolios and take advantage of the new rules, he said. There will be some instances where the assets were undervalued and will get revalued. There may be some increases in values and reductions in values. Investors and regulators will be interested and will view any effort by the banks to look at the their portfolios as beneficial to the markets in general.
David Larsen, managing director of Duff & Phelps, a firm that was recently engaged by the TARP Congressional Oversight Panel to value assets purchased as part of the Treasury bailout program, sits on FASBs Valuation Resource Group. He believes the changes will help with the fair value process. Larsen pointed out that an earlier standard, FSP FAS 157-3, issued last October, has already indicated that accountants should use all the available information and available input to value an asset.
There was a tendency to use observable input, said Larsen. This FSP will give them all the available information that should be taken into account. However, he does not anticipate seeing major swings in banks reported income as a result of the accounting rule changes. If they were following the 157 principles, if they were taking into account the available information, its unlikely there will be a change, he predicted. If they were using the distressed pricing, there will be a large change.
Others are not so sure. The revisions to FAS 157 appear to be designed to alleviate capital adequacy problems at banks and credit unions, as many financial institutions that would benefit from this guidance have requested retroactive application, said Espen Robak, president of Pluris Valuation Advisors. In our view, those issues are best addressed by regulators and lawmakers, not by the FASB, which has the vital role of setting generally accepted accounting principles for the U.S.
The American Institute of CPAs greeted the new standards cautiously. We understand that not all stakeholders will be happy with the outcome, said AICPA president and CEO Barry C. Melancon. AICPA committees have expressed their reasonable and well thought-out views on both sides of this proposal by FASB.
The American Bankers Association, which lobbied heavily for the changes, greeted the FASB vote more enthusiastically but indicated that it was not fully satisfied.
We are pleased that 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, said ABA president and CEO Edward Yingling in a statement. Requiring that credit losses be reported in earnings provides a more realistic picture of losses.
However, he added that the ABA is disappointed that FASB is still requiring market losses to be recorded for held to maturity securities, subjecting them to market volatility. 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, said Yingling.
The Financial Services Roundtable, which also lobbied Congress heavily, indicated it now has its sights set on the auditing standards-setter, the Public Company Accounting Oversight Board.
FASB took one step forward, only to take one step backward, said president and CEO Steve Bartlett in a statement. We are pleased with the actions taken with respect to impairment rules; however, we are disappointed with FASBs lack of guidance for identifying an inactive market. The Roundtable's statement added that FASBs action underscores the need for the PCAOB to provide adequate guidance to auditors.
The Roundtable, along with the U.S. Chamber of Commerce, the National Association of Homebuilders and about a dozen other groups, recently wrote a joint letter to the PCAOB urging the board to issue auditor guidance in line with the FASB's expected changes to mark-to-market standards to help protect auditors from liability claims.
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