Sunday, September 28, 2008

FASB Drafts Guidance on Fair Value As Congress Agrees On 3 R’s of Rescue Bill, the EESA

In an article slated for publication Mon. Sept. 29 in BNA’s Daily Report for Executives, Steve Burkholder, considered by many to be the Dean of accounting journalism, breaks the story that: “FASB Staff Crafting Guidance to Help Gauge Fair Value in Inactive Markets.” This is a significant escalation of action by FASB, following last week’s meeting of its Valuation Resource Group formed to advise the standard-setter on implementation issues arising from FAS 157, Fair Value Measurement.

The U.S. accounting board is acting at a time when debate is swirling in Washington, D.C. and elsewhere over whether fair value (mark to market) accounting has played a role in the credit crisis, amid requests for further guidance from the SEC and FASB, as noted in our earlier coverage,
We Didn’t Start the Fire (Sale) and Other Than Temporary Impairment (OTTI).

Three R's of the Rescue Bill

Lawmakers were literally burning the midnight oil last night to reach consensus on enhancements to Treasury’s proposed $700 billion bailout package, with the New York Times reporting that “Congressional leaders and Treasury Secretary Henry M. Paulson emerged from behind closed doors to announce [a] tentative agreement at 12:30 a.m. Sunday.”

According to the "Summary of the Draft Proposal to Rescue U.S. Financial Markets,"
issued by House Speaker Nancy Pelosi’s office last night (posted on the Wall Street Journal website earlier today, replaced with updated material - see UPDATE, below), the plan tentatively agreed to by Congress (to be formally voted on Monday) revolves around three main themes: reinvest, reimburse, and reform. Specifically: “Reinvestment in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street, Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets , and Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes.”

UPDATE 9PM SUNDAY: The WSJ reports this evening: “U.S. Seals Bailout Deal.” The article, by Deborah Solomon, Damian Paletta and Greg Hitt, says: “The Bush administration and congressional leaders agreed on a deal to authorize the biggest banking rescue in U.S. history.” The bill is entitled The Emergency Economic Stabilization Act of 2008, and the preceding link takes you to a copy of the draft bill and related summaries of its provisions, as posted by the House Financial Services Committee. As to timing, the WSJ reports “The House plans to vote on the measure Monday, with the Senate likely to follow later in the week…. Passage is seen as likely, despite the measure's unpopularity. Support from House Republicans, who staged an 11th-hour revolt on Thursday, will be vital, as will the backing of the Democratic leadership.”

FASB's Potential Guidance
Congress and the administration apparently are not the only ones burning the midnight oil. BNA’s Burkholder reported that a FASB staff director told him that “[FASB] staff …. is working on guidance intended to help companies apply the board's two-year-old rules on fair value accounting in situations in which there is little or no market activity.” As to timing, Burkholder quotes FASB’s Russell Golden saying: “The staff believes this is a priority. We expect to go to the board in the near term."

It is not yet known entirely what the scope of FASB’s guidance will be, or whether the board will necessarily approve its release. At a minimum, Burkholder writes, citing Golden, the guidance is likely to include some examples of when it is appropriate to apply ‘Level 3’ inputs in inactive markets. Level 3 inputs are defined in the FAS 157 ‘hierarchy’ as ‘unobservable’ inputs such as model-based inputs including cash-flow derived models. FAS 157 emphasizes use of ‘level 1’ inputs (including market prices for identical assets) or ‘level 2’ inputs (market prices for similar assets) with ‘level 3’ unobservable inputs being more of a fall-back position when there is a lack of level 1 or 2 inputs. However, in the current environment of illiquid markets fraught with ‘fire sale’ prices that differ substantially from fundamental valuation models, there have been calls for more guidance to specify when ‘level 3’ inputs can be used.

In a related move, FASB announced on Friday it has postponed its webcast on Application of FAS 157, originally scheduled for Mon. Sept. 29, to take place some time “within the next few weeks.” The announcement notes: “In light of recent events in the financial markets, and the legislation under consideration by the Administration and Congress, the FASB plans to redesign the webcast to provide real-time insights about the role of accounting standards in providing transparency to investors. Postponing the webcast will give auditors, preparers, users of financial statements, and regulators an opportunity to consider the application of FASB Statement No. 157, Fair Value Measurements, and other applicable generally accepted accounting principles (GAAP) to financial reporting issues that may arise from the pending legislation and recent market conditions.”

Given that companies are looking for immediate guidance to apply to their Sept. 30 quarter-ends, it will be interesting to see what form the FASB staff guidance will take, whether it will be discussed by the board at a public meeting, and whether it will be issued in final form immediately, or in draft form for public comment. Normally discussion at a public board meeting and a comment period would be provided if the guidance were to come in the form of a proposed FASB staff position (FSP), and it is possible FASB could conceivably propose guidance this week with, e.g., a 10 day comment period, but indicate companies would be able to adopt the guidance as of the date of the initial proposal if no changes are made in the final guidance.

Alternatively, perhaps due to something akin to ‘emergency’ circumstances, FASB probably could, particularly if it has the backing of the SEC, issue final guidance immediately in the form of examples or implementation guidance without having to go through a notice and comment period. We will update this post to add links to any further info posted by FASB on this matter (sign up here if you’d like to receive our blog by email), and keep an eye on www.fasb.org, www.sec.gov and www.pcaobus.org for further developments.

Separately, FASB announced on Friday the appointment of Marc A. Siegel as a new FASB board member, succeeding George Batavick whose term ended June 30. Siegel, a forensic accounting specialist, officially starts his board duties on Oct. 20, leaving his current job as head of the Accounting Research and Analysis Group at RiskMetrics Group. He served in a similar capacity with the Center for Financial Research and Analysis or CFRA, founded by Dr. Howard Schilit, which was acquired by RiskMetrics. Siegel has also served on FASB’s Investors Technical Advisory Committee (ITAC).



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