FASB Approves New Mark-to-Market Guidance


Exactly three weeks after FASB Chairman Robert Herz’s March 12 testimony before a rancorous House Financial Services subcommittee, the independent standard-setting board voted Thursday to release three new pieces of guidance to address concerns over the application of fair value accounting standards in current market conditions.


All three new pronouncements will be published in the form of FASB Staff Positions (FSPs). FASB Technical Director Russell Golden said in a press conference following the meeting that the final FSPs would not be available until next week.


FASB Staff Position no. FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, establishes a process to determine whether a market is not active and a transaction is not distressed. The FSP says companies should look at several factors and use judgment to ascertain if a formerly active market has become inactive. Once a market is determined to be inactive, more work will be required. The company must see if observed prices or broker quotes obtained represent “distressed transactions.” Other techniques such as a discounted cash flow analysis might also be appropriate in that circumstance, as long as it meets the objective of estimating the orderly selling price of the asset in the current market.


The AICPA’s Accounting Standards Executive Committee (AcSEC) submitted a comment letter to FASB recommending against adoption of FSP FAS 157-e based on concerns that it could be interpreted in a way that would contradict the exit price model of FASB Statement no. 157, Fair Value Measurements.


But following the meeting, AcSEC Chairman Jay Hanson said he was pleased that FASB clarified during its deliberations on Thursday that the FSP is not intended to change the measurement objective of Statement no. 157.


“Hopefully, the market for these debt instruments will once again begin functioning normally and obviate the need for the use of this guidance,” said Philip Santarelli, CPA, a member of the AICPA Private Companies Practice Section (PCPS) Technical Issues Committee (TIC), which filed comment letters on the fair value proposals. “But, it is likely that other hard-to-value assets may encounter unusual market conditions in the future, and this framework will be helpful.”


The second FASB document—FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairmentsdeals with other-than-temporary impairment (OTTI). This FSP was passed by a 3-2 vote. Under the new rules, once an OTTI is determined for a debt security, the portion of an asset write down attributed to credit losses may flow through earnings and the remaining portion may flow through other comprehensive income, depending on the situation and facts involved. There will be several new required disclosures about how the charges are split.


Initial reaction from financial institutions regarding the new OTTI rules was positive.  “I am pleased to see the changes being made and believe they will provide more accurate financial information,” said Security Financial Bank CFO Mark C. Oldenberg, CPA. “I expect there will be substantial discussion on how to determine ‘credit losses’ versus ‘market losses’ and whether to allow recovery of OTTI losses.”


Santarelli said TIC applauds FASB for “appropriately requiring the credit loss component to be recognized notwithstanding the intention with respect to holding the investment.” He said the committee believes “the additional disclosures required as to the assumptions used in making the decision will provide needed transparency.”


But at least some investors did not appear to be quite so enthusiastic. “The new guidance seems to be a result of government pressure,” said Jason S. Inman, CPA, of McDonnell Investment Management LLC.  “The fair value concept before the change allowed for greater transparency in the market and for an investor to make a decision as to whether or not the company had the ability to hold those assets until recovery.”


“Investors lost on this vote,” wrote former FASB Emerging Issues Task Force member Jack Ciesielski, CPA, on the AAO Weblog regarding the new OTTI rules. “And they will have to pay more attention to other comprehensive income in the future, as it becomes a more frequently-used receptacle for unwanted debits. When investors note these ‘detoured charges’ in earnings, they should skip the detour and factor the full charge into their evaluation of earnings.”


The third piece of guidance—FSP FAS 107-B and APB 28-A, Interim Disclosures About Fair Value of Financial Instruments—will increase the frequency from annually to quarterly of disclosures providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.


All three FSPs will be effective for periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. However, if a company wants to adopt the FSP FAS 115-a, FAS 124-a, and EITF 99-20-b in the first quarter, it must also adopt the FSP FAS 157-e at the same time.


Matthew G. Lamoreaux is a JofA senior editor. His e-mail address is  mlamoreaux@aicpa.org .


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