Friday, January 23, 2009

FASB To Reexpose Amended Proposal on Disclosures of Financial Instruments, Proposing 1Q09 Effective Date

At its board meeting earlier today, FASB voted to reexpose Proposed FASB Staff Position (FSP) No. FAS 107-a, Disclosures About Certain Financial Instruments. The reexposed proposal will be significantly different from the original proposal released on Christmas Eve.

The amended proposal, expected to be released next week for a 30 day comment period, would amend FAS 107, Disclosures About Fair Value of Financial Instruments to require the FAS 107 disclosures – currently provided annually – to be provided in interim (quarterly) financial reports.

Based on discussion at the board meeting, it appears the revised proposal will NOT include a requirement for disclosure of ‘incurred loss’ amounts (a new measurement attribute that had been proposed in response to concerns that fair value amounts are unduly depressed by illiquidity in current market conditions).

However it appears FASB may retain a proposal to provide certain pro forma income amounts incorporating fair value measurements.

Board members noted preparers may not have focused on the original proposed FSP issued in December since they were in the midst of closing the books, and those that did file comment letters may have been more focused on major issues like the proposed ‘incurred loss’ requirement, and may not have focused on the operationality of the new requirement to, in essence, provide FAS 107 annual disclosures on a quarterly basis.

The proposed effective date would be interim periods ending on or after March 15, 2009, thus, for calendar year companies, it would apply to 1Q09 interim reports and 10-Qs. With a 30 day comment period on the upcoming reexposure of the proposed FSP, the final FSP (following board redeliberations when the comment period ends) is not expected to be issued until some time in March.

Another point highlighted at the meeting was an inconsistency between FAS 107, para. 31 (which still permits discounted cash flow entry value amounts as a fair value for certain loans, although other parts of FAS 107 were amended previously when FAS 157 was issued, that portion of para. 31 of FAS 107 remained intact), vs. the exit value notion of FAS 157, Fair Value Measurement. Board members decided not to try to fix this inconsistency in the short-term FSP but to take it up as part of their existing projects on loan loss disclosures or their existing project on financial instruments.

It was mentioned at the board meeting that FASB’s Valuation Resource Group (VRG) is meeting on Feb. 5, and the above issue will be brought to their attention. An area of emphasis at the VRG meeting, said board member Leslie Seidman, will be to discuss the SEC’s Dec. 31 Report to Congress on mark to market accounting; the SEC did not recommend a suspension of fair value (mark to market) accounting, but recommended that FASB consider whether further guidance is needed on fair valuing in illiquid markets.

There was also some discussion in today's FASB board meeting of the existing (cost- based) practicability exception in FAS 107, the existing scope exception for private co’s with less than $100 million in total assets and no derivatives (in FAS 126 amending FAS 107), and other potential scoping issues. It was not clear from the discussion precisely how FASB will handle these issues in the proposed FSP; regardless of what they propose, it appears they will seek comment on these issues.

The information above is based on my listening to the webcast of the FASB meeting. As always, reference should be made to FASB’s official Summary of Board Decisions, which is generally posted in FASB’s News Center same-day or the day after board meetings. Additional details based on my observations of the FASB webcast can be found in this FEI Summary. (NOTE: the FEI summary can be accessed by FEI members only - if you're not a member, join now and get free registration to attend FEI's Summit Conference May 4-5 at the Gaylord Texan Resort in Grapevine, Texas, visit and feel free to let me know if you have any questions about FEI membership, or to contact Nancy Ehlers, Manager, Membership & Chapter Relations, at or 973-765-1099 (mention the blog sent you).

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