Herz noted he has received several phone calls from constituents who were under the impression that today’s board meeting would be the last public board meeting at which the FIRM project would be deliberated prior to issuing an Exposure Draft. He emphasized that is not the case, and that FASB plans to hold several additional board meetings on the FIRM project prior to releasing an ED.
He provided an extensive discussion of due process in his opening remarks (perhaps, in part, as a result of recent comment letters filed by the American Bankers Association, detailed further below), including, "I expect that we will have many more public meetings to discuss a whole host of issues that we need to address in developing a comprehensive proposal," before an ED is issued. "Once we receive comments on our ED, we identify all the key issues that come out of those comments, all the other input that we receive, then we go thru a redeliberation process [in] a series of board meetings." He added, "experience indicates changes often are made [in the final standard] based on the comments and input that we get. And, only after we have gone thru that kind of very extensive and thorough public due process, would we issue a final standard."
Herz also noted that several public roundtables on financial instruments are set to take place in September, [Sept. 3 (Tokyo), Sept. 10 (London), Sept. 14 (Norwalk, CT)], jointly sponsored by FASB and the International Accounting Standards Board.
FASB's Assistant Director of Technical Activities, Kevin Stoklosa added that the staff plans to post a detailed project plan on the financial instruments project ‘soon’ (supplementing material currently posted), which will address the project plan on FIRM, impairment, and hedging. Additionally, staff plan to post a comparison between FASB’s proposed model for financial instruments, and the IASB’s proposed model.
All Financial Instruments To Be Carried At Fair Value
As recapped in the August 13 FASB board handout, FASB decided at its July 15 board meeting that: “All financial instruments will be presented on the balance sheet at fair value with changes in value recognized in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which will be measured at amortized cost.” Further details are in the board handout.
At the August 13 board meeting, FASB discussed: (1) Balance sheet presentation for financial instruments whose changes in fair value are recognized in net income, (2) Presentation within net income for financial instruments whose changes in fair value are recognized in net income, and for financial liabilities eligible for the amortized cost option, (3) Balance sheet presentation of cumulative credit losses for financial instruments whose changes in fair value are recognized in other comprehensive income (OCI), (4) Foreign currency transaction gains/losses for financial instruments whose fair value changes are recognized in OCI, and (5) Disaggregation of other changes in fair value. See FASB's Summary of Board Decisions for official results of the August 13 board meeting. Additional highlights from the board's discussion can be found in this FEI Summary. (NOTE: FEI members-only can download the FEI Summary; Join FEI to have access to members-only summaries, reduced registration fees at our upcoming conferences and events, and more.).
American Bankers Association Voices Concern
In related news, the American Bankers Association issued a white paper yesterday, entitled: The Current Pace and Direction of Accounting Standard Setting. The white paper, attached to an ABA Aug. 12 comment letter to FASB and the IASB, follows on an earlier white paper entitled, Loans and Debt Securities - Principles to Follow in Developing a New Accounting Model, attached to an ABA Aug. 4 comment letter. In their August 4 letter, ABA said it is "deeply concerned about the direction being taken on the FASB and IASB 'joint project' relating to recognition and measurement of financial instruments... Because ...two types of assets [loans and debt securities] represent a majority of the U.S. banking industry's total assets, your actions are expected to have a major impact on the business of banking."
"During the current economic crisis," continues ABA's Aug. 4 letter, "preparers of financial statements, external auditors, regulators and others have agreed that 'mark to market' accounting (MTM) estimates have lacked a sufficient level of reliability. With this experience, it is surprising that the IASB and FASB would both establish new accounting models that expand the use and prominence of MTM rather than either reduce it or at least maintain the current level."
ABA adds, "We understand that certain investors and investment bankers who provide input to the Boards advocate MTM... however, accounting rules should address a wide variety of users and provide information that is relevant to generating cash flows and determining the prospect for generating future cash flows. Therefore, bankers have consistently advocated that, in contrast to a "one-size fits all" model that is emphasized by pro-cyclical MTM, accounting for loans and debt securities held at banking institutions should reflect the applicable business models used by bankers."
In their follow-up letter to FASB and the IASB on Aug. 12, ABA states it is "concerned about the process being taken on the FASB and IASB projects relating to financial instruments." Observing that, "[t]he changes that the FASB and IASB are considering represent the most significant accounting changes we have ever experienced," and that "[t]he rapid paces at which both organizations are working, as well as the paths being taken, are causing some to question whether there is due process in evaluating these important issues," ABA states, "We encourage the FASB and IASB to make such changes only with utmost caution and the appropriate level of due process to correspond with the magnitude of the changes."
ABA also observes that some have pointed to pressure on FASB and the IASB from the U.S. Securities and Exchange Commission, Members of Congress, the G-20, and others. However, ABA notes in its August 12 letter/white paper, that: "[B]ankers question whether the massive changes being contemplated by the IASB and FASB were truly contemplated by those requesting quick action."
"Given the possible consequences upon all financial services industries, bankers believe a more deliberate discussion among these groups, financial statement users, regulators and preparers be conducted to identify what degree of change is needed," says ABA in their August 12 letter. "For instance, confusion over the mere terms "transparency" and "fair value" can have unintentional adverse repercussions and result in missing a more reasonable repair of current standards."
[My two cents: I understand ABA's point about potential confusion among some constituents or members of the public about the meaning of the term 'fair value.' I've noted from time to time that many people would not necessarily know how fair value is arrived at in accordance with generally accepted accounting principles, (including requirements, in certain circumstances, to arrive at 'hypothetical' market values) and if you ask the man/woman/child on the street "Would you like to see Fair Value?" it's doubtful they'd answer "No." Or, as someone else told me, nobody's going to say, "No, I'd rather see Unfair Value."]
Read more highlights from the ABA letters.
FASB Director of Communications Neal McGarity provided the following reaction to the ABA letter. (Note: McGarity's comment was provided to me separate from the FASB meeting, there was no mention of specific comment letters during FASB's meeting):
"The ABA white paper makes mention of a 'rapid pace' that is underway and that is just flatly not true. This morning FASB chairman Herz underscored in our board meeting the very long and robust due process ahead on this issue and he noted he could not foresee real changes pertaining to financial instruments in place earlier than 2011. We are taking a very measured and comprehensive approach to this complex issue and have many discussions and roundtable meetings ahead before an exposure draft will even be created."
FASB Project Manager Melissa Maroney noted at the conclusion of the August 13 board meeting that the staff has begun to conduct additional outreach on fair valuing deposits.Maroney said that staff has been “Reaching out to firms and constituents to get an understanding of methods used to value deposit intangibles, and additional outreach to users.”
She added that the staff is documenting various alternative approaches for the board, and plans to bring the issue back to the board for deliberation later in August or September.
FASB Chairman Robert Herz asked the staff if they are doing outreach to regulators; staff responded that they are.
FASB Board Member Mark Siegel said ,“To amplify that, on deposits specifically, [outreach] has already started. He noted that at one of the board’s educational sessions, there was “a walkthrough presentation how this could be done to figure out the fair value of deposits,” and that, “we have had a couple of analyst calls, small group meetings” at which that issue was discussed. As noted further above, FASB and the IASB will hold a series of roundtables on financial instruments in September.
Changes To Securitization, Consolidation (of SPE/VIE) Rules
Separately, ABA noted in their Aug. 12 comment letter to FASB/white paper that they had previously requested regulatory guidance relating to capital requirements in light of changes to FASB's rules on securitizations and consolidation (i.e. relating to changes in accounting for special purpose entities or variable interest entities.) ABA states:
- These new rules [FAS 166, FAS 167], which are expected to significantly increase regulatory capital requirements for entities that securitize assets, puts into question whether such coordination [with regulators] was performed.
- While some are still digesting the rules and continue to question the logic used in the rules, as of this date, banks have not been notified as to how to react to these new requirements from a regulatory capital perspective.
- The restoration of securitized credit markets may be delayed further because of these new rules and the lack of information about the regulatory impact.
NOTE: on the subject of the changes to securitization and consolidation (of SPE, VIE) accounting under FAS 166, FAS 167 (amending FAS 140 and FIN 46R) issued in June, FASB has a webcast slated for Aug. 24 to further describe these changes.
Everybody's Got an Opinion
Fair value/financial instruments accounting has received a fair amount of interest in the blogosphere lately. See, e.g. Prof. Tom Selling's Aug. 12 post, FASB Could Finally Get Loan Accounting Right - Well, Less Wrong, in his blog, The Accounting Onion. Of course, what's a blog if there isn't somebody with another point of view - and earlier today, Prof. Bob Jensen, a former American Accounting Association Educator of the Year, shared his views on this subject in a CPA listserv sponsored by Loyola College in Maryland. Looks like this matter will be in Friday's edition of the Wall Street Journal as well, see FASB Looks To Expand Mark Rules by Michael Rapoport.
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