At yesterday’s FASB board meeting, the board reaffirmed the effective date for its upcoming FSP on Employers’ Disclosures about Postretirement Benefit Plan Assets will be fiscal years ending after December 15, 2009, with early application permitted. (In effect, FASB reaffirmed this extended date which it agreed to at its Sept. 24 board meeting, which is one year later than as originally set forth in Proposed FSP FAS 132R-a.) The board agreed to require the type of disclosures set forth in FAS 157, including a reconciliation of beginning and ending balances for fair value measurements of plan assets using significant unobservable inputs. In discussion at the board meeting, the board considered, but decided not to include, any differential treatment for private companies, and decided not to defer the effective date for private companies. The board authorized the staff to proceed to a ballot draft. Further details are in FASB’s Summary of Decisions Reached.
Separately, FASB agreed at its board meeting yesterday that a proposed FSP should be issued regarding assets and liabilities arising from contingencies in a business combination (an FSP providing guidance on FAS 141R, Business Combinations). Details on the boards decisions on this matter are in FASB’s Summary of Decisions Reached. An interesting part of the discussion centered on litigation contingencies and potential convergence work between IASB and FASB on accounting for contingencies.
FASB Chairman Robert Herz noted that with respect to the two projects FASB will undertake on contingencies, the first being the current project on disclosure of contingencies (the proposed FAS 5 amendment released earlier this year), the second being recognition and measurement of contingencies, “I am more sanguine at this point on improvement in disclosures, that should be for all contingencies, not just acquired ones, than I am on a converged solution on recognition and measurement; we would hope we could get there, but fair value approaches to certain contingencies in this country, litigation ones, I think will be pretty tough unless we get the immovable object in our system [the legal system, to change],.. we... have to admit, unless we change our system here, we almost have to have a U.S. carve-out [on litigation contingencies], I don’t know how a U.S. company would adopt [IFRS] without the change.”
Board member Tom Linsmeier replied, “That’s why I’d hope we can join the conversation” in terms of trying to come up with a converged standard on contingencies, so that “our constituents are part of the process that IASB is thinking about… either we can get converged or we can’t, rather than put our constituencies in a [situation] what IASB does is said and done, and the only [option] is for a [U.S.] carve-out.”
Initial Highlights From SEC Roundtable on Mark-to-Market Accounting
FAS 141R (Business Combinations) was also referenced at the SEC’s roundtable on mark to market accounting which took place yesterday.
One of the most significant comments - in my view- was from panelist Chuck Maimbourg, SVP Accounting Policy at Key Bank, who said that his bank turned down an acquisition earlier this year when they realized how extensive a mark-down FAS 141R would require them to take on loans acquired, since the loans would have to be marked to fair value upon acquisition.
SEC Division of Corp Fin Chief Accountant Wayne Carnall, a moderator at the roundtable, asked Maimbourg, “You did not complete an acquisition because of FAS 141R accounting?” Maimbourg replied, “yes.” Carnall followed up: “Even though the economics made sense, accounting drove the decision?” Maimbourg again said yes. FAS 141R was just a small part of the discussion of fair value accounting during the roundtable.
Another significant comment - in my view - was a suggestion by Vin Colman of PwC, to address concerns of those who believe fair value accounting has exacerbated the credit crisis, that the SEC and FASB could:
- consider separating periodic changes in fair value (FV) into 2 components, incurred credit losses and other changes in FV, including liquidity discounts
- recognize, first, incurred credit losses in income, all other changes in Other Comprehensive Income (OCI), until the asset is sold or matures, and
- change the format of the income statement for more visibility of changes in FV and inclusion of OCI on face of the income statement
I am not saying the above suggestion is necessarily the way to go, but it was a substantive suggestion for consideration. See Colman’s written statement.
A number of panelists said they did not believe fair value or mark to market accounting was the root cause of the credit crisis, and that the SEC's study of mark-to-market accounting should consider root causes as well.
Additionally, various panelists suggested bank regulators try to address procyclicality concerns directly by amending capital requirements, rather than by changing the fair value accounting model.
However, the most vociferous opponent of the fair value accounting model in place under FASB Statement No. 157, Fair Value Measurement, former FDIC chairman William Isaac, said that even if bank regulators modified their approach to capital requirements, in recent months, it was not the bank regulators who precipitated the failure or takeover of major banks like Wachovia and WaMu, but the actions of ratings agencies and short sellers, who were making decisions based on fair value GAAP-based information, thus rendering the argument of separate treatment or backing out of fair value related results by regulators essentially moot in terms of calming the credit crisis.
The view of the investor community represented by the CFA Institute and others, was that the fair value accounting rules provide important transparency.
Isaac was asked by one of the moderators, SEC Corp Fin Director John White, to take an ‘investor’ point of view of the fair value accounting rules. Isaac said he was happy to do that, noting, “Nobody ever talks about the hundreds of billions of dollars pension funds have lost because of these rules, my aunt lost because money invested in banks, stable source of earning dividends, not a dot-com investor, got wiped out in banks, conservative banks..” He added, “I am concerned for the investor and all the unemployment [this is] going to cause,.. Treasury is handing out capital just about as fast as FASB and SEC are going to destroy it… These rules are destroying capital, and you are asking me to put more money in.” He noted the fair value accounting rules result in: “not real losses, but paper losses, when marking against computer models… our banking system doesn’t have 35 to 1 leverage, [a leverage ratio referenced by another panelist] a couple investment banks did, our banks are the best capitalized by far [compared to other countries], and you are destroying them by paper losses, not real losses.”
He added: “The words fair value, you can’t have those words, you can’t own those, I’m for fair value accounting, I don’t believe marking to a computer model of fire sale prices based on distressed sales is fair value; fair value is to look at cash flows, [and] probably [look at] losses if you have a default.” .
Isaac advocated that the SEC suspend FAS 157, noting in its place he’d prefer to see amortized historical cost, along with recording permanent impairment, and what assets could be sold for today (without marking them down to that number). See Isaac’s written statement.
We will post further highlights from the SEC roundtable in a summary on www.financialexecutives.org later this week.