FASB To Release Proposed Amendment to EITF 99-20 This Week, To Address Concerns About Impairment

At its board meeting yesterday, FASB discussed issues raised during its three recent joint roundtables with the IASB on accounting issues in the credit crisis, and voted to take certain long- and short-term actions in response.

The first such action FASB agreed to yesterday that can potentially take effect this year-end is the release of a proposed amendment to EITF 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.(EITF is FASB’s Emerging Issues Task Force.)

Certain language in EITF 99-20, an issue which arose in the late 1990's in a different market environment, has been alleged to cause excessive writedowns that are not only in excess of estimated incurred losses or credit losses, but are said to be inconsistent with losses calculated under another standard, FAS 115, Accounting for Certain Investments in Debt and Equity Securities.

FASB was particularly sympathetic with the point made about the potential inconsistent application of its standards in agreeing to propose the following amendment to EITF 99-20:

• Amend paragraph 12b of Issue 99-20 to be consistent with paragraph 16 of Statement 115 by removing “market participants” and requiring that there has been a “probable” adverse change in estimated cash flows. In addition, a similar amendment would be required for paragraph 12a with regard to interest income recognition.

The proposed effective date for this amendment is interim periods ending after December 15, 2008 (that is, for the period beginning October 1, 2008), with transition on a prospective basis.
FASB staff said they expect to release the Exposure Draft of the proposed amendment to EITF 99-20 by this Friday Dec. 19, and there will be at least a 10 day comment period (potentially ending Dec. 30 or 31).

The board expects to vote on a final amendment at its first board meeting in January. (NOTE: Yesterday, the board indicated their first meeting of 2009 would be Wed. Jan. 7; based on a look at the FASB calendar today, it appears they added a board meeting for Monday Jan. 5 – potentially to discuss this issue.) Staff members stated yesterday the goal would be to issue a final amendment by Jan. 8, which they believed would be in time for companies to rely on in their year-end earnings releases issued in January.

It is important to note that approval of the final amendment is not necessarily a fait accompli (as is always the case, technically) since board members will vote on a final amendment after reviewing comment letters and other feedback. However, in this case, some board members expressed a fair amount of reluctance on whether they would ultimately support the proposal, but were willing to release it to see what the comments would say.

A FASB staff member said the staff had polled a group of 12 users, who were evenly split on this proposed change, with some strongly supporting it as a way to enhance comparability (with FAS 115) and thereby reduce complexity, and other users strongly opposed to such a potential change.

Board member Tom Linsmeier, one of those who expressed reluctance on issuing the proposal, said, “I would be willing to expose this proposal, but I would like to see out of the comment letters, before (we) finalize vote to affirm, that there are really economic circumstances being accounted for improperly, that is, mis-timing of losses, I would look for that in comment letters. I remain skeptical, but for reasons (FASB staff) put forward, I’d be willing to explore (the proposal) for the reason (that) some users said it would be beneficial.”
Separate Exposure Draft of Disclosures proposed for year-end

Disclosures Proposal Also Coming This Month, More

Also at yesterday’s board meeting, FASB voted to release for public comment an Exposure Draft which would propose certain disclosures for financial instruments, which would also become effective as of this year-end - described further in the board handout), to provide information on fair value of financial instruments for which the accounting rules do not currently require those instruments to be carried at fair value with the valuation change going through earnings.

Additionally, FASB agreed to add a long-term project - a joint project with the IASB - to its agenda, to take a comprehensive look at reporting of financial instruments.

Separately, FASB also discussed whether to add a project to its agenda on permitting recoveries of Other than temporary impairment, and whether to add a project to issue a clarification of FAS 133 on derivatives.

Complete results of FASB’s meeting will be published in FASB’s Summary of Decisions Reached, which are generally posted on FASB’s News Center within a day of FASB board meetings. We will also post additional information in a summary on FEI’s website.

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