FASB Proposes Further Deferral of FIN 48-Uncertain Income Taxes-For Private Pass-Thru Entities, Further Guidance

Serena Dávila, FEI’s Director of Technical Activities in our Washington, D.C. office, staff liaison to FEI’s Committee on Private Companies, shared with us info on FASB’s decisions reached earlier this week on private company application of FASB Interpretation No. 48, Uncertain Income Taxes (FIN 48).

As background, Dávila notes private co’s are currently under a deferral of FIN 48, set forth in FSP FIN 48-2, issued in February, which stated: “This FSP defers the effective date of Interpretation 48 for nonpublic enterprises included within this FSP’s scope to the annual financial statements for fiscal years beginning after December 15, 2007. When effective, Interpretation 48 should be applied as of the beginning of the enterprise’s fiscal year.”

With the end of the deferral period for private co’s looming, FASB discussed at its Oct. 1 board meeting whether certain types of nonpublic entities should receive a further deferral of FIN 48, and discussed disclosure relief from certain provisions of FIN 48 for all private companies.

FEI’s Committee on Private Companies (CPC), standards subcommittee, notes Dávila, filed a comment letter with FASB in August asking that private companies be exempted from FIN 48. The FEI CPC letter backed a similar request made on May 30 by the Private Companies Financial Reporting Committee (PCFRC), a joint committee of FASB and the AICPA.

At its meeting on October 1, FASB considered comment letters received. Although FASB did not grant a further deferral of FIN 48 for all private companies, the board agreed to propose a further deferral for all private pass-through entities based on the entity’s federal income tax status, and to propose disclosure relief from certain provisions of FIN 48 for all private companies. FASB will also release a third proposal to provide guidance on application of FIN 48 by private pass-through entities.

Further details on results of the FASB meeting (the FIN 48 item) can be found in FASB’s Summary of Decisions reached and in this FEI summary (FEI members).

In other FASB action this week, we reported previously on FASB’s decision to issue further guidance on fair value by authorizing release of Proposed FSP FAS 157-d, to include examples of fair valuing in inactive markets. The proposed FSP is expected to be released today, and statements made by FASB earlier this week indicated the comment period would end Oct. 9 so that FASB could hold a board meeting on Oct. 10 to discuss comments received and finalize the FSP in a timely matter to apply to third quarter reporting. In related news we also reported on the joint SEC-FASB guidance issued on Sept. 30 on fair value in inactive markets. If you’d like to receive our blog by email, sign up here.

Senate Passes Financial Rescue Bill (EESA), Goes To House Next; FASB Takes Further Action

Last night, the U.S. Senate passed its version of the bill aimed at rescuing the financial markets and the broader economy from the current market turmoil. Dubbed the Emergency Economic Stabilization Act of 2008 (EESA), the bill passed the Senate by a vote of 74 to 25. One of the leading proponents of the bill, Senator Chris Dodd, Chairman of the Senate Banking Committee, released this statement following the vote. A copy of the Senate’s version of EESA is posted on the Senate Banking Committee website as of October 1 as follows: Senate version of EESA; Senate one-page summary of EESA; Senate section by section summary of EESA.

Earlier in the week, the U.S. House of Representatives failed to pass their version of the bill. The bill which passed the Senate includes significant changes from the House’s September 29 version of the bill. The next step is for the House to vote on an updated version of their bill; the vote is expected to take place today.

Mark-to-Market (Fair Value) Accounting in Senate Bill Identical to Earlier House Version
The Senate version of EESA passed on October 1 included identical provisions regarding mark-to-market (fair value) accounting as the earlier House bill did. Specifically, Section 132 of the bill reiterates the SEC’s authority to suspend application of FAS 157 if the SEC determines that would be in the public interest and the interest of investors. Section 133 of the bill requires the SEC, in consultation with the Federal Reserve and Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings. See FEI summary of Sections 132, 133 of the EESA.

FASB Requests Comments by Oct. 9 on Proposed FSP on Fair Value; Guidance is In Addition to SEC-FASB Guidance Issued Sept. 30
FASB voted yesterday to issue further guidance on the application of FAS 157, Fair Value Measurement in inactive markets, in the form of an illustrative example(s). This decision follows by one day the Sept. 30 clarification of fair value accounting in inactive markets issued jointly by the SEC and FASB.

Companies should take note of the effective date and transition provisions which FASB plans to propose, as noted in FASB’s Summary of Decisions Reached: “The Board agreed to make proposed FSP FAS 157-d effective upon issuance; if the proposed FSP is finalized in time, entities with a calendar year-end would apply the guidance in their third-quarter financial statements. In addition, the Board accepted the staff recommendation that the following transition guidance be provided in the proposed FSP: Any changes in fair value would be included in an entity’s financial results; for example, entities with a calendar year-end would include any changes in fair value in their third-quarter results, and Retrospective application of the guidance to prior periods would be prohibited.”

Also as noted in FASB's Summary of Decisions Reached, the comment deadline on Proposed FSP 157-d will be Oct. 9, and FASB states it plans to meet on October 10 “to discuss the comments received in response to the Exposure Draft of the proposed FSP FAS 157-d and any additional matters.”

Watch FASB’s website http://www.fasb.org/ for the posting of Proposed FSP FAS 157-d, and visit FEI's website http://www.financialexecutives.org/ for updates on the latest news and information about our upcoming conferences, including our annual Current Financial Reporting Issues Conference (CFRI) in November, featuring remarks by the Chairmen of the SEC, FASB and IASB. If you'd like to receive our blog by email, sign up here.

SEC, FASB Issue Fair Value Guidance, More To Come

Late yesterday, the SEC and FASB issued guidance on use of fair value accounting in inactive markets. See SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting. Concurrently, FASB announced it has added a new item to the agenda for its board meeting today to discuss issuing additional guidance in the form of a Proposed FASB Staff Position (FSP) relating to FASB Statement No. 157, Fair Value Measurement (FAS 157). Although the official decision as to issuing the proposed FSP will be made at this morning’s FASB board meeting, some advance info is available in FASB’s board handout, which references the guidance issued jointly by SEC and FASB yesterday, and states the Proposed FSP would provide additional guidance through an example. According to the board handout, the FASB staff intends to propose to the board this morning that the proposed FSP be issued for a one week comment period, ending Oct. 9. This unusually short comment period would be to provide timely guidance for companies to apply to their fourth quarter financial statements (for the quarter ending Sept. 30). The SEC-FASB press release issued on Sept. 30 was to formalize guidance in time for quarter-end.

In related developments, some news reports say that relief or even a suspension of mark-to-market accounting will be incorporated into the draft amendment to be voted on by the Senate today to incorporate the economic ‘rescue’ bill into an existing bill that was already passed by the Senate. A vote by Congress would then follow. (Members of Congress are emphasizing the bill will promote a ‘rescue’ of the economy, vs. a ‘bailout’ since some constituents reportedly railed against funding a ‘bailout’, which some attribute to the failure of the bill to pass the House on Monday.) Other news reports said that a letter was sent to the SEC by over 60 members of Congress yesterday (Sept. 30), asking the SEC to act on mark-to-market accounting. Whether the SEC-FASB announcement yesterday is viewed as going far enough by those who believe fair value (mark-to-market) accounting had a procyclical effect in contributing to a downward spiral in the credit markets, will probably be something that Members of Congress consider in deciding whether to incorporate further accounting provisions into their bill.

Presidential candidate Senator John McCain issued a statement supporting the SEC’s action yesterday. (We did not see a statement issued by Senator Barack Obama but we will update this post if we find one.)

In our post last week entitled We Didn’t Start the Fire (Sale) we provided links to letters sent to the SEC by the American Bankers Association and the Financial Services Roundtable requesting immediate further guidance from the SEC on fair value. The SEC-FASB action yesterday appears to be at least partially in response to such requests. We also provided in that post a link to a letter sent to the SEC by the CFA Institute, an association of analysts, viewed by some as representative of the ‘investor’ view, which supported FAS 157 and opposed the kind of action ABA and FSR were asking of the SEC. One thing of note is that not all ‘investors’ have a monolithic view; one well known CFA with a different view than the CFA Institute is Vinny Catalano, former president of the New York Society of Security Analysts, who has frequently written about the need to provide further guidance on FAS 157, since ‘market values’ may work in efficient markets, but the current market is not really ‘efficient’. We will update this post to add some more links to related material later this week.