FASB has received close to 100 comment letters (91 posted as of 9:00 pm Oct. 9) on its proposed guidance for Determining the Fair Value of a Financial Asset in a Market That is Not Active, released last week in the form of a Proposed FASB Staff Position (FSP), Proposed FSP FAS 157-d. The number of comment letters is sure to inch closer to 100 since FASB is still in the process of posting comment letters, including the letter filed by FEI’s Committee on Corporate Reporting (CCR) (see FEI CCR letter, referred to as “the FEI letter” below).
A vote is expected at today’s FASB board meeting on whether FASB wishes to proceed in finalizing the FSP, and any potential changes it will make in light of the comment letters received. FASB fast-tracked the proposed fair value guidance (released on October 3, with a comment deadline of October 9 and vote on October 10) in an effort to be responsive to requests for guidance on applying FASB’s fair value standard, FAS 157, Fair Value Measurement, under current market conditions characterized by illiquidity.
The proposed FSP was released for public comment a few days after the U.S. Securities and Exchange Commission and the FASB issued a joint clarification on applying the fair value rules in inactive markets, published in an SEC press release on September 30 (see SEC-FASB joint clarification on Fair Value.) See also this FEI statement issued October 8, commending the response to the credit crisis, which references the SEC-FASB joint clarification and SEC’s recent announcement that it has launched its Congressionally mandated study of the impact of mark-to-market (also called fair value) accounting.
The approximately 100 comment letters filed on FASB’s proposed FSP reflect diverse views on the usefulness of the proposed FSP as currently drafted, ranging from some saying the proposal would overly ‘relax’ fair value standards, to others saying the proposal provides insufficient guidance. Similarly, there is a debate evident in the comment letters over whether FASB should retain the fundamental approach of FAS 157 which relies on ‘exit values’ obtained in observable or hypothetical transactions made by ‘market participants’ in the ‘current market,’ (see, e.g. letters from Deutsche Bank, Moody’s Investors Service) or whether that fundamental approach should potentially be changed to more rationally apply the guidance in today’s illiquid markets and to avoid contributing to a procyclical reaction or downward spiral of market prices and related accounting valuations (see, e.g. letters from U.S. Bancorp, the Group of North American Insurance Enterprises(GNAIE), and The Real Estate Roundtable).
And, the New York State Banking Department is recommending “that instruments with no observable inputs (i.e. Level 3 under FAS 157) should be recorded at the lower of cost or fair value when inputs were last observable.”
The actual number of comment letters filed to date on the proposed FSP understates the level of interest in this subject, due to the “understandably short time frame for comments and not lack of interest,” notes the comment letter filed by the American Bankers Association (see ABA comment letter). The ABA letter was among those that asked for further clarification of certain matters, in the proposed FSP or in the future, such as: “What is a distressed sale? What is a forced liquidation? When is a market so seized that it is appropriate to conclude any sales are distressed/forced? What level of evidence is needed in a principal-to-principal market with no public data?” Similarly, the letter from Glass Lewis & Co. was among those recommending further clarifications of terms such as ‘inactive’ be provided.
A number of comment letters (e.g., Credit Suisse, Citigroup) asked that the scope of the FSP be expanded to include liabilities as well as assets. Additionally, Citigroup commented on the proposed effective date of the guidance: “We are concerned that, due to time constraints, it is not possible to implement the modeling techniques described in the FSP to a large number of positions before issuance of the third quarter financial statements. We therefore ask that the FSP would permit rather than require application of the guidance in calendar year third quarter financial statements. However, the mandatory adoption date of the FSP should be in periods ending subsequent to the issuance of the FSP.”
The FEI Committee on Corporate Reporting letter (“FEI letter”) noted that FEI “appreciate[s] FASB’s intent via the proposed FSP to clarify the application of FAS 157 in an inactive market.” However, FEI is also “concern[ed] with the example provided in the proposed FSP, because it still produces a fair value measurement that reflects a transaction price in an illiquid market and thereby undermines the potential benefit of the clarification provided by the SEC-FASB [September 30] announcement.” FEI continues, “[A]s currently written, we interpret the example [in the proposed FSP] to indicate that those cash flows are required to be discounted using rates that reflect current market participant assumptions including those related to credit and liquidity risk. We believe that the end result of this interpretation is a measure of fair value that is still reflective of a distressed sale vs. a transaction between a willing buyer and willing seller under the requirements of FAS 157.” FEI therefore recommends the FSP be revised “to clarify its intent and make it consistent with the thrust of the SEC-FASB joint statement which recognized the validity of considering management’s cash flow analysis, intent and ability to hold financial instruments as part of the total mix of information to be considered measuring fair value in inactive markets, along with the application of professional judgment.” Specific wording changes are suggested for the FSP by FEI.
Additionally, the FEI letter addresses the relationship between and relative standing of the SEC-FASB joint clarification published on September 30 and the proposed FSP, and “recommend[s] the FASB or SEC considers formalizing the joint clarification by publishing it in the form of a Staff Accounting Bulletin (SAB) or by noting publicly that it will be reiterated in an SEC staff announcement at an upcoming EITF meeting.” FEI also “suggest[s]… the final FSP should explicitly state it does not amend or supercede the SEC-FASB joint clarification,” and that “FASB should consider incorporating the SEC-FASB clarification as an attachment to the FSP if that would assist in treating the SEC-FASB clarification as part of GAAP today and the codification of GAAP permanently.”
"In conclusion," states the letter from FEI's Committee on Corporate Reporting (CCR), "CCR would support the issuance of the FSP if Paragraph A 32C is amended as noted [in the letter]. Alternatively, CCR would not object if the FASB decides not to issue the FSP, since we believe it does not currently improve upon, and may conflict with, the guidance provided in the SEC-FASB joint statement."
On the international front, the IASB is trying to move swiftly to converge toward U.S. GAAP’s treatment of transfers or reclassifications from trading to held for investment type categories which have differing income statement treatment of changes in market value. We previously noted the IASB’s recent statement on its current response to the credit crisis, there have also been a number of articles recently in Accountancy Age on happenings in Europe and the U.S. regarding fair value, including “Fair Value Suspension Would be ‘Obfuscation,’” citing a related Letter to the Editor of the Financial Times by Jane Fuller, Chair of the CFA Society [of the U.K.’s] Accounting Advocacy Committee. AccountancyAge states: “[CFA Society’s] Fuller said the SEC's clarification had punctured some of the myths about fair value accounting: 'management's cash-flow assumptions can be used to establish fair value and that distressed sales do not represent the "orderly" transaction between "willing" parties required for simple mark-to-market valuations.'” See also “Fair Value: Victim of a Witch Hunt” by Gavin Hinks & David Jetuah in AccountancyAge.
For further discussion of FAS 157’s methodology vs. potential alternatives, see Prof. Tom Selling’s blog, The Accounting Onion. Another blog with insightful commentary on FAS 157 is the AAOweblog, written by analyst Jack Ciesielski.
SEC Seeks Comment on Fair Value (aka “Mark-to-Market”)
Broc Romanek of TheCorporateCounsel.net blog reported yesterday that the SEC posted a Request for Comment relating to its Congressionally mandated study of fair value (mark-to-market) accounting (see: SEC Spotlight on Fair Value Accounting.) The comment deadline is 30 days after the release (request for comment) is published in the Federal Register. As we previously reported, an FEI Statement issued on October 8 noted that FEI “support[s] the SEC's decision to commence its study of the impact of mark-to-market accounting so quickly after enactment of EESA, as announced by the SEC on October 7.”
Interesting, and I think a first in terms of a ‘study,’ is that the SEC has posted a toll-free number on the aforementioned Spotlight page “for questions on the mark-to-market accounting study,” stating the number is 877-732-9488. 732 correlates with “SEC” on your keypad, presumably the rest of the number was randomly assigned, although I bet there are some folks out there who can figure out an interesting abbreviation (or song) relating to fair value or mark to market accounting that correlates to the rest of the number. (I tried calling the number early this morning, it took me to a recorded message by the SEC's Office of Investor Education and Advocacy, providing basic facts like the website location of info on the SEC's fair value/MTM study, and messages can be left on that line.)
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