FASB Issues FSP EITF 99-20-1 on Impairment of Fin. Instr. (OTTI)

Late yesterday, FASB released final FSP No. EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20. According to FASB, the FSP amends the impairment guidance in EITF Issue No. 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,” to achieve more consistent determination of whether an other-than-temporary impairment (OTTI) has occurred.

The FSP retains and emphasizes the OTTI guidance and required disclosures in Statement 115, FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, SEC Staff Accounting Bulletin (SAB) Topic 5M, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, and other related literature.

Here are just a few highlights from the FSP (additionally, there are numerous references in the FSP as to what "should" be done)

• It is inappropriate to automatically conclude that a security is not OTTI because all of the scheduled payments to date have been received.
  However, it also is inappropriate to automatically conclude that every decline in fair value represents an OTTI.
• Further analysis and judgment are required to assess whether a decline in fair value indicates that it is probable that the holder will not collect all of the contractual or estimated cash flows from the security.
• In addition, [SEC] SAB Topic 5M states that “the length of time and extent to which the [fair] value has been less than cost” can indicate a decline is other than temporary.
• The longer and/or the more severe the decline in fair value, the more persuasive the evidence that is needed to overcome the premise that it is probable that the holder will not collect all of the contractual or estimated cash flows from the security.
• In making its other-than-temporary impairment assessment, the holder should consider all available information relevant to the collectibility of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of future cash flows.

Effective date and transition
The FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. Consistent with paragraph 15 of FSP FAS 115-1 and FAS 124-1, any other-than temporary impairment resulting from the application of Statement 115 or Issue 99-20 shall be recognized in earnings equal to the entire difference between the investment’s cost8 and its fair value at the balance sheet date of the reporting period for which the assessment is made (for example, December 31, 2008, for a calendar year-end entity).

Important! Refer Directly to the FSP
Refer to the FSP directly for further details on all of its accounting and disclosure requirements.
As noted in our post last week summarizing the discussion that took place at the FASB board meeting when the vote was taken to issue this final FSP, 2 FASB board members dissented; their dissenting statement is included in the FSP.

TARP Reform Bill Introduced, Hearings Slated, As COP, GAO Issue Reports

On Jan. 9, House Financial Services Committee Chairman Barney Frank (D-MA) introduced H.R. 384, the TARP Reform and Accountability Act, to amend the Troubled Assets Relief Program (TARP) established under the Emergency Economic Stabilization Act of 2008 (EESA). As noted in this press release, “The legislation will strengthen accountability, close loopholes, increase transparency, and require Treasury to take significant steps on foreclosure mitigation.”

TARP Hearing Jan. 13
The House Financial Services Committee’s hearing on Priorities for the Next Administration: Use of TARP Funds, originally scheduled for Jan. 7, has been rescheduled for Jan. 13 at 2pm.

COP Issues Second Report on TARP
In related news, on Jan. 9, the Congressional Oversight Panel (COP) released the second in its series of reports on the TARP program. According to COP’s Jan. 9 press release, four key areas that demand attention, as detailed in COP’s Second Report, include:

1. Bank Accountability—the Panel still does not know what banks are doing with the taxpayer money they have received.
   
2. Transparency—confidence in markets can only be restored when information is transparent and reliable, but we still have no clear mechanism to ensure transparent and accurate asset valuation and no confidence that the dangers posed by toxic assets have been addressed.
   
3. Foreclosures—Treasury has yet to take any steps to use TARP funds or develop plans to “maximize assistance to homeowners,” as required by law.
   
4. Overall Strategy—Treasury’s shifting explanations for its purposes and the tools used have exacerbated the Panel’s concern that Treasury does not have a coherent overall strategy and goals for use of the TARP funds.
   

COP Hearing On Reg Refom Jan. 14
The COP’s members include Harvard law prof. Elizabeth Warren (chair of the committee), Rep. Jeb Hensarling (R-TX), New York State Superintendent of Banks Richard Neiman , AFL-CIO Associate General Counsel Damon Silvers , and former Senator John E. Sununu.
COP has a third report coming up, as instructed by Congress, will be on the subject of regulatory reform. In connection with preparing its report, COP will conduct a hearing on Jan. 14. Additional information is available at COP’s updated website, http://www.cop.senate.gov/ .

GAO Issues Report on Regulatory Reform
Separately, the U.S. Government Accountability Office (GAO) released a report on Jan. 8 on Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System. As noted in GAO’s summary and detailed in the GAO Report on Financial Regulation, GAO has found that:

[T]he current U.S. financial regulatory system is in need of significant reform.
To help policymakers better understand existing problems with the financial
regulatory system and craft and evaluate reform proposals, this report (1)
describes the origins of the current financial regulatory system, (2) describes
various market developments and changes that have created challenges for the
current system, and (3) presents an evaluation framework that can be used by
Congress and others to shape potential regulatory reform efforts.

GAO observed that significant regulatory gaps formed in recent decades, in part as a result of changes in financial markets and new products introduced. Five such areas noted by GAO include the need to address: (1) systemic risk, (2) less-regulated market participants, including nonblank mortgage lenders, hedge funds, and credit rating agencies, (3) the increasing prevalence of new and more complex investment products, which GAO says have challenged regulators, investors and consumers, and for which GAO observes a failure of regulators to adequately oversee the sale of mortgage and credit products, posing risk to consumers and the stability of the financial system, (4) challenges to accounting and auditing standards (see below), and (5) complication of some efforts on international regulatory coordination due to the U.S.’ fragmented regulatory structure.

Regarding accounting and auditing standards, the report observes:

“[S]tandard setters for accounting and financial regulators have faced growing
challenges in ensuring that accounting and audit standards appropriately respond
to financial market developments, and in addressing challenges arising from the
global convergence of accounting and auditing standards.”

I found it particularly interesting that GAO’s report notes the tremendous expansion in volume of accounting standards in recent years, noting: "As the pace of financial innovation increased in the last 30 years, accounting and financial reporting requirements have also had to keep pace, with 72 percent of the current 163 standards having been issued since 1980—some of
which were revisions and amendments to recently established standards, evidencing the
challenge of establishing accounting and financial reporting requirements that respond to needs created by financial innovation. "

Maybe it isn't surprising that 72% of FASB's standards were issued since 1980 given that FASB was formed in 1973, although there were predecessor standard-setting organizations to FASB under the AICPA. However, the point about the challenge of standards in keeping pace with the market, and a related point not directly made by GAO regarding the challenge posted to those who must implement and audit the increasingly accelerated volume o standards is daunting; this phenomenon has been referred to generically in the past by some as standards overload. I believe if you were to look at the number of FASB standards (GAO apparently looked at actual FASB standrds only, which currently number 163) and related guidance (including EITF consensuses, FASB interpretations and FASB staff positions) issued since 1990 and 2000 the volume of new standards would show an even more accelerated pace.

Among the current accounting challenges noted in GAO's report are off-balance sheet entities (GAO notes FASB has proposed eliminating qualifying special purpose entities or QSPEs), and implementation of FASB’s new standard, FAS 157, fair value measurement, (GAO notes the SEC and FASB issued guidance on Sept. 30 and Oct. 1, 2008 relating to fair value in inactive markets). GAO does not make any specific recommendations on accounting or auditing standard-setting, other than noting what some of the challenges are and that the standard-setters have dealt with (as noted above) and are continuing to deal with these challenges. Additional comments on this subject and other matters included in the report are contained in a letter of the American Bankers Association sent to GAO included as an Appendix to the report. Also included in the Appendices are other letters from various financial services, regulatory, and consumer organizations that reviewed a draft of the report.

Private Cos: New Disclosures Required For Year-End 2008

New disclosure requirements applicable to private companies in documents issued by FASB on December 30 may have gone under the radar screen, FASB was told by its Private Company Financial Reporting Committee (PCFRC) yesterday.

PCFRC specifically discussed a new disclosure requirement relating to income taxes in a FASB document issued on Dec. 30 (FSP FIN 48-3). Also discussed were proposed new disclosure requirements for financial instruments (Proposed FSP FAS 107-a) on which comments are due Jan. 15. Additionally, although not discussed at the PCFRC meeting, FSP FAS 132R-1 issued by FASB on Dec. 30, sets forth new disclosure requirements for pension plan assets for public and private companies for years ending after Dec. 15, 2009, but also contains a technical amendment clarifying existing disclosure requirements for private companies, which is effective immediately.

Income Taxes
FSP FIN 48-3, Effective Date of Interpretation No. 48 for Certain Nonpublic Enterprises, not only defers the effective date of FIN 48 for private companies (see eligibility requirements below), but also includes a new disclosure requirement for private companies which is effective immediately, as stated in paragraph 10 of the FSP:

“A nonpublic enterprise that elects to defer the application of Interpretation 48 in accordance with this FSP shall explicitly disclose that fact and shall disclose its accounting policy for evaluating uncertain tax positions for each set of financial statements where the deferral applies.”

PCFRC chair Judy O’Dell told FASB board members that the new disclosure requirement contained in the FSP was ‘probably going to get missed by a majority of practitioners’ because the disclosure requirement did not appear in the earlier (proposed) version of the FSP.

Therefore, to the extent CPA practitioners and preparers at private companies were aware of the issuance of the final FSP, they may have assumed it was mainly a formality in officially delaying the effective date of FIN 48 for private companies. We discuss this further in Read the Fine Print, below.

Eligibility for the delay: the title of FSP FIN 48-3 notes that the deferral of FIN 48 applies to ‘certain nonpublic enterprises.’ Eligibility requirements as set forth in paragraph 9 of the FSP, and reiterated up front in paragraph 1 of the FSP, note that the following private companies are excluded from the delay: nonpublic consolidated entities of public enterprises that apply U.S. generally accepted accounting principles, and nonpublic enterprises that have already applied the recognition, measurement and disclosure provisions of Interpretation 48 in a full set of annual financial statements issued prior to the FSP’s issuance.

Financial Instruments
Another matter of concern pointed out by PCFRC members at its meeting with FASB yesterday was Proposed FSP FAS 107-a, Disclosures about Certain Financial Assets: An Amendment of FASB Statement No. 107. The FSP was released by FASB on Dec. 24 with a proposed effective date of interim and annual reporting periods ending after December15, 2008. PCFRC members told FASB the timing of the FSP at year-end posed a concern particularly for private companies.

During a discussion preceding the meeting with FASB board members, PCFRC member Tom Groskoph, a Director at Barnes Dennig, an audit, tax and consulting firm located in Cincinnati, referred to the financial instruments disclosures FSP as representing a ‘trifecta’ of concerns to private companies: a short comment period, an immediate effective date, and an issue that was driven more by concerns about public companies than private companies.

The comment deadline on Proposed FSP FAS 107-a is Jan. 15; FASB is expected to vote on whether to finalize the FSP (and may make certain changes based on their consideration of comment letters received) fairly soon after the comment deadline. (In a related action, FASB voted earlier this week to finalize an FSP relating to impairment of certain debt securities, as detailed here.)

Post-Retirement Benefits
Although not discussed at the PCFRC meeting, we wanted to bring your attention to another FSP released by FASB on Dec. 30 which includes not only new disclosure requirements, but a clarification of existing disclosure requirements.

FSP FAS 132R-1, Employers’ Disclosures about Postretirement Benefit Plan Assets includes a technical amendment which is effective immediately, which clarifies that private companies (like public companies) must disclose the amount of net periodic benefit cost.

All other amendments contained in the FSP that increase the disclosure requirements for plan assets, e.g. relating to fair value of plan assets, concentrations and categories of plan assets, and more, are effective for fiscal years ending after Dec. 15, 2009.

And That’s Not All
This blog post does not include ALL new requirements effective as of year-end 2008, we are only highlighting 2 FSPs that were issued on December 30 and one Proposed FSP released on Dec. 24. Refer to the FASB website http://www.fasb.org/ for complete details on all new standards issued in 2008, 2009 and prior years.

Read the Fine Print
Although the disclosure requirement in FSP FIN 48-3 cannot be described as ‘fine print’ – it literally appears in bold in paragraph 10 of the FSP under a subheading entitled ‘Disclosures’ – many people may have wrongly assumed there were no new disclosure requirements based on the title of the FSP which does not mention disclosures, and based on the history of the FSP as pointed out by PCFRC.

News coverage may have also missed this late-breaking development or focused on the most significant aspect of the FSP, the deferral. We admittedly did not post about the release of FSP FIN 48-3 in our blog until now (having been up all night summarizing SEC’s Dec. 30 report to Congress on mark-to-market accounting) although we included a blurb about it - mentioning the deferral as well as the disclosure requirement - in our e-newsletter, FEI Express, that went out to all FEI’s private company members earlier this week. Some blogs, like the NYSSCPA’s new blog, posted about the FSP on Jan. 2, but focused on the deferral, and did not mention the disclosure requirement. FASB’s press release as issued on Dec. 30 did not reference the new disclosure requirement, only the deferral, although it provided a direct link to the FSP, and reference should always be made to the original document (i.e. the standard or FSP).

PCFRC members pointed out to FASB that educational resources relied upon by many CPA firms with mainly private company clients rely on annual updates of new requirements which are published before year-end. FASB board members were not entirely sympathetic to this argument, since there are other avenues for people to become aware of new FASB standards, such as through FASB’s website http://www.fasb.org/ and through various private sector online and print publications. See Resources, below.

Resources
Mark Wells, an observer at yesterday’s PCFRC meeting, mentioned after the meeting with FASB that besides the print services provided by his firm, Thomson Reuters, they also provide an online news update service as part of their Checkpoint program.

CCH also offers an online research and news services as part of its Accounting Research Manager. You can also sign up for a free demo of the program.

BNA provides various tax and accounting newsletters and services. Additional details from the PCFRC meeting can be found in an article in today’s BNA Daily Report for Executives, PCFRC Discusses Process, New User Panel, Board Projects in First Meeting With FASB, by Steve Burkholder.

See also online news services like http://www.accountingweb.com/ and http://www.webcpa.com/.

Professional associations for financial executives and CPAs which provide resources about new accounting developments include the AICPA, state CPA Societies, and professional associations for financial executives like FEI http://www.financialexecutives.org/ and its Financial Executives Research Foundation http://www.ferf.org/ . FERF reports are provided free to FEI members, in addition to our bi-weekly electronic newsletter, FEI Express, as a benefit of membership. FEI advocacy activities also include filing comment letters on proposals; a comment letter filed by FEI’s Committee on Private Companies, standards subcommittee in support of the delay of FIN 48 for private companies was of the comment letters cited by FASB during its board meeting in December when it voted to grant the delay.

For information about membership in FEI and its educational, advocacy, and networking programs, visit our website here and here or contact Nancy Ehlers nehlers@financialexecutives.org and tell her you read about it in our blog.