FASB revampted "mark to market" valuations

Revamps Mark-to-Market Rules
The Financial Accounting Standards Board (FASB) acted on April 2 to modify the fair value ("mark to market") and other-than-temporary-impairment rules. The hard-hit U.S. banking and financial services sector immediately welcomed the news. The board is expected to take final action in the near future.

Quick Action
The FASB was under great pressure from Congress to act quickly, Jay D. Hanson, chair, Accounting Standards Executive Committee, American Institute of Certified Public Accountants (AICPA) told CCH. At a hearing on March 12, members of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises were very critical of the fair value measurement rule and put pressure on the FASB to modify and clarify the rule by the beginning of April, or face legislation that would modify or suspend it altogether. This echoes past calls by lawmakers to suspend fair value accounting (TAXDAY, 2008/10/02, M.1). In mid-March, FASB chair Frank Herzog told Congress that the FASB would issue a proposal within three weeks.

Fair Value Measurements
The controversial fair value measurement rule is explained in FASB Statement 157, Fair Value Measurements (FAS 157), which establishes a definition of fair value and a framework for measuring fair value under U.S. generally accepted accounting principles (GAAP). Accounting standards generally require that financial instruments be measured on a financial institution's balance sheet at fair value. In the current global economic crisis, these standards have required banks and other financial institutions to write down certain assets to very low market levels, prompting some to blame fair value accounting for bank and financial institution failures and the worsening of the financial crisis.

Relaxed Rules
On March 17, the FASB issued a proposed change to the fair value rule and solicited comments, which were due by April 1. On April 2, the FASB met and discussed those comment letters and decided to make significant modifications to the fair value accounting rule. The changes allow officials at companies, including banks and other financial institutions, to use their judgment to a greater extent in determining the fair value of their investments and to avoid writing down losses on impaired investments, including collateralized debt obligations (CDOs).

The new rules will also require reporting companies to provide increased disclosures on their valuation techniques and any changes in such techniques. The new rule will include additional factors for determining whether a market is inactive and permit an entity to base its conclusion about whether a transaction is orderly on the weight of the evidence.

The Board's action addressed proposed FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, and proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments.

"Today's action relates to how to measure value when the market is not active and also to the concept of accounting for other-than-temporary impairment," Hanson explained. The FASB's original proposal relating to measurement when the market is not active resulted in significant "push back," he noted.

Other-than-Temporary Impairment
In a related decision, the FASB decided that a change in existing guidance for determining whether the impairment in a security is other than temporary should be limited to debt securities. This decision also permits an entity, when valuing a debt security, to assert that it does not have the intent to sell the security and it is more likely that not that it will not have to sell the security before recovery of its cost basis. These changes give reporting entities more flexibility in valuation.

"The concept of other-than-temporary impairment is difficult to conceptualize," Hanson explained. In today's market there is some portion of that decline in value that is related to market uncertainty and the general credit-worthiness of the company.

"Under the FASB's action, only the part that relates to credit has to go through the income statement," Hanson said. Additionally, to the extent that a bank has already taken some losses, they can do an accumulated catch-up adjustment, he pointed out.

Effective Date
The relaxed rules take effect for interim and annual financial statement reporting periods ending after June 15, 2009, but companies are permitted to adopt these new rules for interim and annual periods ending after March 15, 2009. The relaxed rules can be applied prospectively only and cannot be adopted retroactively.

Financial Accounting Standards Board (FASB) Summary of Board Decisions: Determining Whether a Market Is Not Active and a Transaction Is Not Distressed

April 3, 2009

Financial Accounting Standards Board (FASB) : Mark to market rules : Other-than-temporary impairments (OTTI) .



SUMMARY OF BOARD DECISIONS

Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board's deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final standard.



April 2, 2009 Board Meeting

Determining whether a market is not active and a transaction is not distressed . The Board discussed comment letters received on proposed FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed. In response to comment letters and additional feedback received, the Board decided to make significant revisions to the proposed FSP. The Board decided that the final FSP would
1. Affirm that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions (that is, in the inactive market).

2. Clarify and include additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active.

3. Eliminate the proposed presumption that all transactions are distressed (not orderly) unless proven otherwise. The FSP will instead require an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence.

4. Include an example that provides additional explanation on estimating fair value when the market activity for an asset has declined significantly.

5. Require an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the FSP and to quantify its effects, if practicable.

6. Apply to all fair value measurements when appropriate.

The Board also affirmed its previous decision that the FSP would be applied prospectively and that retrospective application would not be permitted. The Board decided that the FSP would be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Board decided that an entity early adopting this FSP must also early adopt FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments. Additionally, if the entity elects to early adopt FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, it must also elect to early adopt this FSP and FSP FAS 115-2, FAS 124-2, and EITF 99-20-2.

The Board directed the staff to proceed to a draft of the final FSP for vote by written ballot.

Recognition and presentation of other-than-temporary impairments. [This summary of decisions will be posted as soon as it is available.]

Interim disclosures about fair value of financial instruments . The Board redeliberated proposed FSP FAS 107-b and APB 28-a, Interim Disclosures about Fair Value of Financial Instruments , in light of comments received and decided to proceed to a final FSP. The final FSP will amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require an entity to provide disclosures about fair value of financial instruments in interim financial information.

The Board affirmed its previous decision that the FSP would apply to all financial instruments within the scope of Statement 107. The Board also affirmed its previous decision to require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements.

The Board decided that only public entities would be required to provide the fair value disclosures in interim financial information.

The Board decided that the FSP would be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Board decided that an entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, and FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments .

The Board directed the staff to proceed to a draft of the final FSP for vote by written ballot.

Insurance contracts . The Board continued deliberating the joint project on accounting for insurance contracts by discussing what cash flows an entity would use in measuring the fulfillment value of an insurance contract.

The Board agreed that a measurement of the fulfillment value of an insurance contract should use expected cash flows rather than a best estimate of cash flows. The Board also agreed that those expected cash flows should be updated each period.

The Board discussed whether market inputs should be part of the measurement of cash flows when a fulfillment value notion is used. The Board agreed that the measurement of cash flows should consider all available information that represents the fulfillment of the insurance contract. All available information includes, but is not limited to, industry data, historical data of an entity's costs, and market inputs when those inputs are relevant to the fulfillment of the contract.

Conceptual framework: objective and qualitative characteristics . The Board reviewed responses to the Exposure Draft, Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information, and tentatively affirmed the proposals in the chapter on Objective, including the proposals on the objective of financial reporting and the primary user group. The Board decided to clarify that financial reports do not necessarily exclude forward-looking or prospective information. The description of an economic phenomenon should be amended to reflect this decision.

The Board directed the staff to proceed to drafting:
1. The final versions of the chapters on the objective of financial reporting and the qualitative characteristics of and constraints on financial reporting

2. The Exposure Draft on the reporting entity concept.
Financial Accounting Standards Board (FASB) Summary of Board Decisions: Recognition and Presentation of Other-Than-Temporary Impairments (OTTI)

April 3, 2009

Financial Accounting Standards Board (FASB) : Mark to market rules : Other-than-temporary impairments (OTTI) .

Recognition and presentation of other-than-temporary impairments. The Board discussed comment letters received on proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments. The Board made the following decisions in response to comment letters and additional feedback received:



Scope
1. The Board decided that the change to existing guidance for determining whether an impairment is other than temporary should be limited to debt securities.



Recognition
2. The Board decided to replace the existing requirement that the entity's management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert

a. It does not have the intent to sell the security; and

b. It is more likely than not it will not have to sell the security before recovery of its costs basis.

3. The guidance will incorporate examples of factors from existing literature that should be considered in determining whether a debt security is other-than-temporarily impaired and how those factors interact with the requirement to assert that the entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis.

4. When an entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

5. An entity will be required to recognize noncredit losses on held-to-maturity debt securities in other comprehensive income and amortize that amount over the remaining life of the security in a prospective manner by offsetting the recorded value of the asset unless the security is subsequently sold or there are additional credit losses.

6. The FSP will include guidance stipulating that credit losses should be measured on the basis of an entity's estimate of the decrease in expected cash flows, including those that result from an increase in expected prepayments.

7. The guidance will clarify that existing premiums or discounts and subsequent changes in estimated cash flows or fair value should continue to be accounted for in accordance with existing guidance (for example, EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets").



Presentation
8. An entity will be required to present the total other-than-temporary impairment in the statement of earnings with an offset for the amount recognized in other comprehensive income.

9. An entity will be required to present separately in the financial statement where the components of other comprehensive income are reported, amounts recognized in accumulated other comprehensive income related to the noncredit portion of other-than-temporary impairments recognized for available-for-sale and held-to-maturity debt securities.



Disclosures
10. The disclosure requirements of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, will be modified to require an entity to provide the following:

a. The cost basis of available-for-sale and held-to maturity debt securities by major security type

b. The methodology and key inputs, such as performance indicators of the underlying assets in the security, loan to collateral value ratios, third-party guarantees, levels of subordination, and vintage, used to measure the portion of an other-than-temporary impairment related to credit losses by major security type

c. A rollforward of amounts recognized in earnings for debt securities for which an other-than-temporary impairment has been recognized and the noncredit portion of the other-than-temporary impairment that has been recognized in other comprehensive income.

11. Statement 115 and FSP FAS 115-1 and FAS 124-1 will also be modified to require that major security classes be based on the nature and risks of the security and additional types of securities will be included in the list of major security types listed in Statement 115.

12. The above additional disclosures, as well as all existing Statement 115 and FSP FAS 115-1 and FAS 124-1 disclosures, will be required for interim periods

When adopting the new guidance, an entity will be required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-temporary impairment from retained earnings to accumulated other comprehensive income if the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery. The cost basis used to calculate accretable yield will also be adjusted to reflect this adjustment (that is, the entity will no longer accrete the noncredit component of a previously recognized other-than-temporary impairment through earnings).

The Board decided that the FSP will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Board decided that an entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed. Additionally, if the entity elects to early adopt FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS 157-4, it must also elect to early adopt this FSP.

The Board directed the staff to proceed to a draft of the final FSP for vote by written ballot.



American Bankers Association (ABA) Welcomes Financial Accounting Standards Board (FASB) Guidance on Mark-to-Market Accounting and Impairment Rules

April 3, 2009

American Bankers Association (ABA) : Financial Accounting Standards Board (FASB) : Mark to market rules : Other-than-temporary impairments (OTTI) .


ABA WELCOMES FASB GUIDANCE ON MARK-TO-MARKET ACCOUNTING AND IMPAIRMENT RULES



Concerned about inconsistent application for "held to maturity" securities


WASHINGTON - The American Bankers Association commends the Financial Accounting Standards Board today for finally offering new guidance on mark-to-market accounting and impairment. ABA expressed concern however, that FASB has not done enough to fully repair the accounting rules for securities classified as "held to maturity."

The FASB voted this morning to approve new guidance that will provide much needed clarification in estimating market values in illiquid markets. This guidance will allow banks and their auditors to use judgment when valuing illiquid assets that are required to be marked down to market prices under current accounting rules.

"Today's decision should improve information for investors by providing more accurate estimates of market values," said Edward Yingling, president and CEO of ABA.

ABA has for years warned of the pro-cyclical nature of mark-to-market accounting and has pushed for immediate repairs to this rule since March 2008.

FASB also voted this morning to improve the accounting for debt securities that are required to be classified as "impaired." Under the new guidance, impairment that is reflected in earnings will be more closely linked with actual credit losses -rather than market losses.

"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 Yingling. "Requiring that credit losses be reported in earnings provides a more realistic picture of losses.

ABA is disappointed that FASB is still requiring market losses to be recorded for "held to maturity" securities, which should never be subject 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.

American Institute of Certified Public Accountants (AICPA) Accounting Standards Executive Committee Comment Letter to Financial Accounting Standards Board (FASB)

April 3, 2009

American Institute of Certified Public Accountants (AICPA) : Financial Accounting Standards Board (FASB) : Mark to market rules : Other-than-temporary impairments (OTTI) .

April 1, 2009

Mr. Russell Golden

Technical Director

Financial Accounting Standards Board

401 Merritt 7

Norwalk, CT 06856-5116

Dear Mr. Golden:

The Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants is pleased to offer comments on the FASB's Proposed Staff Positions (1) FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments, and (2) FSP FAS 157-e, Determining Whether a Market is Not Active and a Transaction is Not Distressed .

Accounting standards are a keystone of our financial reporting system and are designed to provide neutral, relevant, transparent information to those who rely on and make decisions based on that information. We appreciate that FASB operates in that spirit, which is one reason why we believe that accounting standards are most effectively set by the private sector FASB.

The current financial crisis highlights the challenges associated with the exit price notion (described in FASB Statement No. 157, Fair Value Measurements ) in a market that is not active. We encourage the FASB to continue to refine fair value measurement guidance as application issues are identified, and to complete the other related fair value projects currently on its agenda.



Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b

Overall, AcSEC supports the issuance of this FSP. We offer the following comments for the Board's consideration.
 We believe equity securities should not be included in the scope of the FSP. The primary reasons we believe they should be excluded are (1) the changes proposed in the FSP related to including only a portion of the impairment of debt securities in earnings does not apply to equity securities and (2) the changes to the "intent and ability to hold" assertion, as discussed further below, has added significant confusion as to the Board's intentions. Further, the FSP should clarify whether perpetual preferred securities should be treated as debt or equity securities for purposes of this FSP.

 Paragraph A3 amends paragraph 15 of FSP FAS 115-1 to say that "in determining the amount of the total impairment related to credit losses the reporting entity shall use its best estimate of the amount of the impairment that relates to an increase in the credit risk associated with the specific instrument." It further states that the measurement methodology in FASB Statement No. 114, Accounting By Creditors for Impairment of a Loan , is one way of doing that estimate. We believe that FASB should identify other appropriate methods if it intends that FASB Statement No. 114 is not the only methodology that could be used. Failure to do so in this FSP may lead to inconsistent application and further requests for implementation guidance. Also, we note that the FSP's description of the measurement of a decline in fair value attributed to an increase in the credit risk associated with an instrument may differ from a measurement of a credit loss under FASB Statement No. 114 due to widening credit spreads.

 There is substantial confusion regarding the intent and expectations of FASB proposing a "more-likely-than-not" test (as opposed to the current "intent and ability to hold" test) for determining whether an other than temporary impairment exists. For example, some believe the proposed language is a significant change that will have a great impact and substantially extend the period of time an impairment is considered temporary, while others believe the wording change is not meant to create a significant change in practice as compared to current requirements. We recommend that FASB clarify the intention of the proposed language as it relates to the current literature.



Proposed FSP FAS 157-e

Overall, AcSEC does not support the issuance of this FSP as it is constructed. We believe that the FSP's presumption that transactions in a market that is not active are distressed is inconsistent with the objectives of the fair value measurements standard (FASB Statement No. 157), and the FSP may lead to measurements that ignore observable data and do not represent fair value. We are unable to reconcile the fair value objective in the FSP to the underlying exit price notion embedded in FASB Statement No. 157.

Further, even if the FSP eliminates the presumption, AcSEC believes the practical effects of the FSP could result in ignoring transaction prices in situations in which those prices might be the best representation of an exit price for purposes of measuring fair value. AcSEC also believes that if a level 3 measurement is necessary, the FSP should make clear the objectives of that measurement and illustrate how those objectives are achieved in the FSP example.

AcSEC also is concerned about unforeseen unintended consequences of this FSP. For example, we appreciate that one of the immediate concerns of those calling for this FSP relates to securities and financial instruments tied to mortgages. We are concerned that this FSP might lead to unnecessary, unforeseen accounting issues for financial assets that are not tied to mortgages.

********

We appreciate the opportunity to comment on the proposed FSPs. As noted in the opening to this letter, the current financial crisis highlights the challenges with fair value measurements. The Board may wish to acknowledge that (a) the FSPs are designed to be temporary standards during a time of financial crisis and that ultimately these issues will be addressed by the Board in longer term, more comprehensive projects, (b) FASB will continue to address application issues as they develop, and (c) FASB will review the results of the changes from these FSPs in the coming months and years to assess whether they accomplished their objectives. The Board may also wish to explicitly acknowledge that all parties with a voice in the financial reporting system need to (1) support the professional judgments made in good faith by preparers and auditors as they implement and audit, respectively, fair value measurements and (2) invest sufficient resources to produce and verify credible valuation inputs and results. We also encourage the Board to conduct a series of web casts as soon as possible after the final decisions on the direction of these FSPs to assist all interested parties understand the implications.

We are available to discuss our comments with Board members or staff at their convenience.

Sincerely,

Jay D. Hanson

Chairman

Accounting Standards Executive Committee

American Institute of Certified Public Accountants (AICPA) Statement on Today's Financial Accounting Standards Board (FASB) Action on Fair Value

April 3, 2009

American Institute of Certified Public Accountants (AICPA) : Financial Accounting Standards Board (FASB) : Mark to market rules : Other-than-temporary impairments (OTTI) .


AICPA STATEMENT ON TODAY'S FASB ACTION ON FAIR VALUE


New York, New York (April 2, 2009) - Barry C. Melancon, president and CEO of the AICPA, issued the following statement on FASB's actions today on mark-to-market accounting:

"The FASB today made some difficult decisions on challenging issues related to fair value accounting in an economic climate unlike any other in memory for most Americans. Now all participants in the financial reporting system have an obligation to move forward and provide the most transparent and reliable information on hard-to-value assets so that our capital markets can use that information to allocate capital efficiently," Melancon said.

"Likewise, we encourage all participants in the financial reporting system, including regulators, to exhibit a strong spirit of cooperation as financial statement preparers and auditors use reasonable, good-faith judgment when valuing and auditing financial assets in illiquid markets," Melancon said.

"Independent, private-sector standard setting of accounting is critical to a free-market economy and everyone involved in the financial reporting system should be committed to that principle. We unequivocally support FASB's continuing independence," Melancon emphasized.

"We understand that not all stakeholders will be happy with the outcome. AICPA committees have expressed their reasonable and well thought-out views on both sides of this proposal by FASB," he said.

More information is available at http://www.aicpa.org/MediaCenter