At its board meeting earlier today, FASB voted to issue three final FASB Staff Positions (FSPs) on fair value in inactive markets, other-than-temporary-impairment (OTTI), and a separate FSP to make certain annual disclosures of fair value quarterly. Some changes from the proposed versions of the FSPs, listed below, will be made based on comment letters received. The three FSPs were released in proposed form as:
- Proposed FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, (the ‘157 FSP’)
- Proposed FSP FAS 115-a, FAS 124-a and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments, (the ‘OTTI FSP’)
- Proposed FSP FAS 107-b and APB 28-a, Interim Disclosures about Fair Value of Financial Instruments (the ‘107 FSP’)
The effective date for all three standards (the upcoming final versions following from the three proposed FSPs listed above) is for periods ending after June 15, 2009.
Early application of the standards for periods ending after March 15, 2009 is permitted, but only as follows:
- If you early adopt the 107 FSP , you must also early adopt the 157 FSP and the OTTI FSP
- If you early adopt the 157 FSP, you must also early adopt the OTTI FSP, and vice versa, (i.e. if you want to early adopt one of that pair, you have to early adopt both), however, you do not have to early adopt the 107 FSP in order to adopt the others.
Retrospective application will not be permitted.
FASB Technical Director Russell Golden said he planned to ask staff to do a post-implementation review looking at some early adopters, and that review would begin in early May. He indicated information from that review would enable the staff “to bring to you any improvements necessary” before the mandatory adoption date.
Changes from earlier proposals
FASB agreed to make a number of changes in the final FSPs from the earlier proposed versions. Among the changes agreed to (vs. the original proposed FSPs) include:
- 157 FSP: establish that the objective is to measure fair value of an orderly transaction in the current market (even if the current market is inactive). See the wording as shown on pg 3 of the board handout. “[E]ven when there has been a significant decrease in market activity for the asset, the fair value objective remains the same. Fair value 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 in the current inactive market.” [NOTE: personal observation: this may be viewed by some as circuitous reasoning, by referencing an orderly transaction in a ‘current inactive market’ instead of an orderly transaction in an active market]. In addition, FASB voted to remove the presumption that all transactions in inactive markets are distressed, but provide some additional factors to consider, and require companies to weigh factors indicative or orderly transactions more heavily than factors indicative of distressed transactions. [NOTE personal observation: some of the factors discussed by staff during the meeting could be highly restrictive, e.g. that one such signal of being ‘distressed’ is when a company is in bankruptcy or receivership, so reference will need to be made to the factors identified in final FSP, in light of understanding that companies will be asked to ‘weigh’ all available evidence/factors.] The board also agreed to require new disclosures (beyond those originally proposed) as described on pg 7-8 of the board handout.
- OTTI FSP: limit scope to debt securities; require that credit losses should based on the reporting entity’s estimate of the decrease in expected cash flows, and that a decrease in expected cash flows that results from an increase in expected prepayments should be accounted for as a credit loss. New disclosures will be required, some of which are listed in paragraph 25 on printed pages 10-11 (pdf pages 20-21) of today’s board handout.
- 107 FSP: require qualitative and quantitative disclosures (e.g. qualitative includes significant assumptions and methodologies) at interim and annual; retain practicability exception, but board member Leslie Seidman noted she would be surprised to see companies exercise the practicability exception, since they would have to explain why they cannot provide the info, which they may view as reputational risk) . NOTE: The board voted to exclude private companies from the 107 FSP.
Independence and due process
In a press conference following FASB’s vote on the above three FSPs, Theresa Polley, President and COO of the Financial Accounting Foundation (FAF) which oversees the FASB, said the FAF discussed by conference call on March 16 (the day FASB voted to release the proposed FSPs on 157 and OTTI) FASB’s plan for expedited due process, and agreed FASB acted within the established minimum timeframe for exposure to public comment, and that its due process, while accelerated, was responsive.
Questioned about investor assertions that FASB’s independence was adversely impacted by political pressure (e.g., the March 12 Congressional hearing on mark-to-market accounting at which FASB Chairman Robert Herz was explicitly asked if FASB could provide final guidance on fair value and OTTI by April 2), and in response to assertions made by some groups such as the CFA Institute and FASB’s Investors Technical Advisory Committee (ITAC) asserting that the proposed guidance would not serve investors, Herz responded, “We very much value input we get from the CFA Institute and ITAC. As part of this process, we deliberately reached out to many investors, analysts and others, had hour-long conversations with many of those groups, many major mutual funds, hedge funds, rating agencies.” He added that of the investors they reached out to, “Some had a similar view to CFA Institute, but the majority did not, the majority agreed with what we are doing as to separating credit and noncredit portions” (i.e. of OTTI).
Herz added, “We reached out to forty actual investors in financial institutions,” reiterating again that the majority did not agree with the CFA Institute view, and that “they [investors they reached out to] emphasized the need for more disclosures.”
On the question of independence and due process, Herz noted “We went through full due process, we probably got more input on this then when we [provide] a three month comment period.” FASB received over 300 comment letters on the proposed FSPs on fair value and OTTI (on each), which were released for public comment by FASB on March 17.
The topic of FASB’s independence and due process was also commented on by some FASB board members immediately following their votes and prior to the press conference.
FASB Board Member Larry Smith said, “Several user groups, including ITAC, the Consumer Federation of America, the CFA institute, wrote some very critical, but yet thoughtful letters, that made me sit back and think long and hard, particularly [regarding the] 115 [FSP], before deciding to proceed.”
He added, “We are an independent standard-setter, and it is important we maintain our independence in setting standards; at the same time, how can we ignore what is going on around us – people are readily admitting, recognizing, the markets seem to be in turmoil, we have very polarized views on fair value and OTTI… it is easy for me to support [the] OTTI [FSP], consistent with my view of financial instruments, but whether we should proceed in response to Bob’s visit to Washington, or what have you, I ultimately decided this is an improvement.”
Herz added, “Many of the users we had hour-long conversations with, supported the direction and breakout [of credit vs. noncredit impairment], and felt adamant, with or with out any of that, there is a lack of information in this area.”
FASB Posts Summary of Board Decisions
UPDATE: Thursday evening (April 2), FASB posted its Summary of Board Decisions-April 2 meeting. FASB has already posted a link to the audio from its press conference, which you can find at http://www.fasb.org/.
See the comment letters filed by FEI's Committee on Corporate Reporting on the 157 FSP and OTTI FSP. See the comment letter filed by FEI's Committee on Private Companies, Standards Subcommittee on the 107 FSP.
More FASB News
Yesterday, FASB released FSP 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies
Separately, FASB has posted its Summary of Board Decisions on yesterday’s (April 1) board meeting. Topics discussed included:
- Revenue recognition (discussed measurement)
- FAS 140 amendments (transfer of financial assets)
- FIN 46R amendments (consolidation of variable interest entities)
- Ratified for exposure the consensuses reached at EITF March 19 meeting
FASB staff are proceeding with drafting the final amendments to FAS 140 and FIN 46R; they have not yet formally requested permission to proceed to a ballot draft, a final decision as to effective date and transition still has to be made and may be discussed at a future board meeting.
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