FASB Issues Final Staff Positions to Improve Guidance and Disclosures on Fair Value Measurements and Impairments

On Thursday, April 9th, the Financial Accounting Standards Board, which sets U.S. accounting rules, announced therelease of three final FASB Staff Positions (FSPs) on fair value (aka mark-to-market accounting), particularly with respect to applying FAS 157, Fair Value Measurement, in inactive markets, and regarding the accounting rulesimpacting other-than-temporary-impairment (OTTI), and fair value disclosures in interim periods.

• FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fairvalue measurements more consistent with the principles presented in FASB Statement No. 157, Fair ValueMeasurements.
• FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, enhancesconsistency in financial reporting by increasing the frequency of fair value disclosures.
• FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

The issuance of these final FSPs follows a period of intensive and extensive efforts by the FASB to gather input on the proposed guidance as stated by FASB Chairman Robert H. Herz. The FASB also reported that they received over 600 written comment letters, many emails, and held many face-to-face meetings and other discussions with a broad range of affected constituents. Herz added in the public announcement, “Our careful consideration of the input resulted in some changes in the final documents from the guidance first proposed.  The changes include a number of new disclosures relating to the determinations of fair value and to estimated credit losses and credit exposures. Virtually all of the investors providing input expressed the need for greater transparency by banks. Taken together, these three new documents require significantly expanded and enhanced disclosures.”
 
The guidance comes after the board voted in favor of the changes a few weeks ago, under pressure from Congress. It will allow companies more flexibility in their use of mark-to-market accounting.
 
On Thursday, March 26, former SEC Chairman Arthur Levitt, Jr., was published in the OpEd segment of the Washington Post commenting on Congress, FASB and fair value. Levitt's OpEd, entitled, Weakening A Market Watchdog: An Accounting Rule Change's Real Costs, discussed the pressure that was brought to bear on FASB to amend or provide further guidance on its rules regarding fair value measurement (aka mark-to-market accounting), particularly with respect to applying FAS 157, Fair Value Measurement, in inactive markets, and regarding the accounting rules impacting other-than-temporary-impairment (OTTI). He notes that FASB Chairman Robert Herz was told at the March 12 Congressional Hearing on mark-to-market accounting: "Don't make us tell you what to do, just do it," (Rep. Randy Neugebauer (R-Tex.)) and "If you don't act, we will," (Rep. Gary Ackerman (D-NY)). "This is like being forced to give your boss several mulligans in a round of golf," says Levitt in the WashPost OpEd, adding, "And so last week, the FASB voted to propose allowing banks to obscure -- some might say bury -- the full extent of impairments on many of the bad loans and investments they made and securitized over the past few years."
 
The move is expected to improve earnings and capital levels at banks. Lawmakers, banks and other supporters of the changes had argued that the earlier version of the rules forced companies to price assets at fire-sale prices, creating a downward spiral and billions of dollars in write-downs. In the board's formal guidance, FASB said the changes would be effective for the second  quarter period for most U.S. companies, but early adoption would be permitted for the first quarter.
 
“FASB guidance will allow companies to record actual credit losses rather than mark down their assets to a price based on lack of market trading,” said Edward Yingling, president of the American Bankers Association (ABA). “This will help provide a more realistic picture of losses.” The ABA in September joined Blackstone Group LP Chairman Stephen Schwarzman and 65 members of the U.S. House of Representatives to urge that FASB-mandated fair-value accounting be suspended. William Isaac, chairman of the Federal Deposit Insurance Corp. from 1981 to 1985, has said fair value is a major cause of the credit crisis. Robert Rubin, the former Citigroup senior counselor and Treasury secretary, said on January 27, “the rule has done a great deal of damage.”
 
FASB reported that its new guidance explains how companies should use mark-to-market when a market is not active, and says there is a need to use judgment in ascertaining when a formerly active market has become inactive. The board, as expected, will also require more disclosures by companies about expected cash flows, credit losses and aging of securities with unrealized losses, in deciding how to take write-downs on assets that have fallen sharply in value.
 
Banks are going to be able to assess a value on some of those assets based on what they’d command in an orderly sale, as opposed to the previous rules that made them set a value based on what they’d get in a forced or distressed sales environment. Banks had complained that the rules understated the value of some assets they carried because, in many cases, there weren’t functioning markets that could set a price for those assets. By forcing the banks to place rock-bottom valuations on those assets, many banks had to maintain higher amounts of capital, something they found difficult in the constrained markets for raising capital. Now banks will be able to use ‘’significant” judgment in valuing those assets. It’s a controversial development, to be sure. Banks have lobbied for an end to these mark-to-market accounting rules. But critics contended that suspending those rules would cloud the transparency of banks’ balance sheets, and make it more difficult to reach informed investment decisions.
 
In the board's formal guidance, FASB said the changes would be effective for the second quarter period for most U.S. companies, but early adoption would be permitted for the first quarter.
 
About the Author
Michele Russo is an Account Director for Partner Finance.  An 11 year veteran of Finance and Accounting Staffing and Recruiting industry, she has been focused on Client Development and Management.  She is an active sponsor of Financial Executives International’s (FEI) Dayton and Cincinnati Chapters and the Institute of Internal Auditors’ (IIA) Dayton Chapter. Michele is also an incoming Board Member for the Dayton Chapter of the FEI and a past Board Member of the  Institute of Management Accountants’ (IMA) Dayton Chapter.