A new report suggests that companies adopting the Financial Accounting Standards Board’s recent proposals on modifying mark-to-market and fair value accounting standards should provide more extensive disclosures to help investors make sense of the impaired assets.
Fitch Ratings noted in the report that because both proposals hinge on either the intent or estimations provided by management, FASB’s proposed qualitative disclosures by themselves may not be sufficient for investment professionals to gain a full understanding of the impairment and fair value conclusions reached by a public company such as a financial institution with impaired assets such as mortgage-backed securities.
Banks have been pushing for the changes in mark-to-market accounting standards, and FASB bowed to pressure earlier this month under threat from a congressional subcommittee.
"Absent increased disclosures, investors and analysts may assume the issuer has taken the least conservative approach to valuation and impairment,” said Fitch Ratings senior director Dina Maher.
Under the new standards, FASB proposes to change the method for determining whether an investment is other-than-temporarily impaired and for identifying inactive markets and distressed transactions when measuring fair value. However, Fitch believes that should these proposals be adopted, disclosures by issuers should be expanded to allow for more thorough and meaningful analysis, regardless of the minimum requirements.
FASB plans to vote on the proposed standards, FASB Staff Position FAS 157-e, “Determining Whether a Market is Not Active and a Transaction is Not Distressed,” and FSP FAS 115-a and EITF 99-20-b, “Recognition and Presentation of Other-Than-Temporary Impairments,” on an accelerated timetable on April 2. Meanwhile, the board has been hearing comments, including a letter from the American Bankers Association, which has been lobbying for the modifications in mark-to-market, claiming that the standards are exacerbating the financial crisis.
The ABA said it strongly supported the FASB proposal, but it still wants to see further modifications in the standards, both in the short and long term. Those include applying the standards to securities with other-than-temporary impairments at the effective date, with a “true-up” for securities with OTTI by recording a one-time beginning balance cumulative adjustment between retained earnings and other comprehensive income to help avoid confusion. The influential banking association also wants the effective date to be second quarter 2009, with earlier adoption permitted.
