Earlier today, FASB voted 3-2 to finalize guidance on impairment of investments in debt securities, including certain changes (discussed below) based on comments received on Proposed FASB Staff Position (FSP) No. EITF 99-20-a, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20.
Board members Tom Linsmeier and Mark Siegel dissented from issuing the guidance, due to concerns about due process and investor views. They noted such concerns were expressed by members of FASB’s Investors Technical Advisory Committee (ITAC) at its meeting yesterday, and in certain comment letters. (See also ITAC member Jack Ciesielski’s Dec. 28 post in his AAOweblog, "The 99-20 Hustle.”)
FASB staff told the board that a majority of the 346 comment letters received as of January 6 supported the proposed guidance. (Linsmeier pointed out that over 50 of those letters were essentially form letters.)
Board members also noted that the SEC, in its recently issued report to Congress on mark-to-market accounting, recommended that FASB consider guidance on impairment.
FSP is a ‘Modest Clarification,’ Not ‘Amnesty’
FASB Chairman Robert Herz voted in favor of issuing the final FSP, with certain clarifications noted below, as did board members Leslie Seidman and Larry Smith.
Herz and Smith agreed with Seidman’s characterization of the final FSP as a ‘modest clarification’ of 99-20. She added that by clarifying the board’s original intent, “I don’t think this represents amnesty on OTTI in the fourth quarter; it still requires assessment of the collectability of cash flows.”
Just because asset is performing currently does not mean it is not impaired
Seidman and Herz noted they were troubled by comment letters that said if the assets were still ‘performing’ on a current cash flow basis, there was definitely no need to take any impairment. Herz said that is not a correct application of existing literature, which includes various factors to be considered in determining if there is impairment, such as those factors enumerated in SEC SAB Topic 5-M . In part to address this concern, the board voted to add language to the FSP described below.
Additional Language to be Added to FSP
The board agreed to include additional clarifying language in paragraph 13 of the FSP, as shown in today’s board handout, as follows:
a. It is inappropriate to automatically conclude that a security is not impaired because all of the scheduled payments to date have been received. However, it is also inappropriate to automatically conclude that every decline in fair value represents an other-than-temporary impairment. Further analysis is often required to assess whether declines in fair value represent declines in the expected cash flows from the issuer of the security.
b. The holder must consider all available information, reflecting past events and current conditions, when developing the estimate of future cash flows. All available information would include the remaining payment terms of the instrument (which, for a security backed by nontraditional loans, could be significantly different from the payment terms in prior periods), economic factors that are relevant to the collectability of the instrument, such as current prepayment speeds, the current financial condition of the issuer(s) and the value of any
underlying collateral. [NOTE: FASB Chairman Robert Herz noted similar language appears in SEC SAB Topic 5-M.]
One concern noted by Linsmeier would be securities backed by commercial mortgages which are still performing, but that performance is based in part on the fact that the payments thus far require interest only, but a balloon payment looms in the future, and collateral in some cases has declined significantly. Herz replied it would not be sufficient to simply look to whether the assets are still currently ‘performing’ given the other factors that must be considered (such as those listed above) in determining impairment.
FSP To Include Broad Reminder of Existing Guidance, But Will Not Take on New Issues
The FSP will include, in the background section, either references to existing literature, or language taken from that existing literature, as to required considerations in impairment and related disclosures required. This will address the concern voiced by Herz that “after reading some of the [comment] letters, I felt the need to remind people, some of their assertions about the way current literature operates is not correct.”
Herz added, “I want to make sure you also [include] in [the FSP]... we remind [people] of the disclosures required by FSP FAS 115-1 and FAS 124-1 [The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments]." He also read directly from SEC SAB Topic 5-M which had language similar to that shown in item b. above.
FASB Technical Director Russ Golden said the FSP will include that information on those existing requirements for impairment accounting and disclosure, which makes it broader than just 99-20.
However, the scope of this particular guidance will not be broadened to address other fair value issues raised in some comment letters; some of those issues as described by staff (noted in the board handout) include questions relating to the definition of fair value, impairment 'triggers,' and other matters. The board declined to address those additional issues in this project, noting they have an expedited longer-term project already underway to address certain issues relating to financial instruments, and that the SEC asked FASB to consider certain issues such as potentially providing further guidance on fair value in illiquid markets, and that would potentially be addressed in other projects as well.
Due process
Golden noted that some members of FASB’s Investors Technical Advisory Committee (ITAC) and some comment letters said that FASB did not follow due process, e.g. by having such a short comment period on the proposed FSP. To address this concern, he said he will include in the background section of the final FSP some discussion about how FASB’s due process in getting constituent feedback goes beyond the comment letter process, and includes information learned at roundtables held by the SEC and FASB over the past year and by other interactions with constituents.
Effective date and transition; Timing of Issuance of FSP
As proposed, the FSP is effective for interim and annual reporting periods ending after
December 15, 2008, and applied prospectively. Based on comment letters received, in which some commenters asked FASB to expressly prohibit reversals of previous OTTI taken in prior periods, the board voted on January 7 to expressly prohibit retrospective application of the FSP. (Separately, one comment which the board chose not to address was regarding OTTI previously taken in regulatory reports filed by nonpublic banking institutions.) Golden said he would have a ballot draft to FASB board members this week, which will include Linsmeier and Siegel’s dissent. As noted in some board members' comments, companies would like to see this guidance issued very soon, to support their year-end earnings releases. Official summaries of the results of FASB board meetings are issued in FASB’s Summary of Board Decisions, generally published same-day or next-day in FASB’s News Center.
More FASB, SEC News
BNA’s Daily Report for Executives included well-written broad-ranging coverage of FASB issues, in the articles, FASB’s Herz Discusses Impact of Financial Crisis on Current, Future Projects, by Steve Burkholder, and Standard-Setters Face Continued Pressure; Financial Turmoil Sets Stage for 2009, by Burkholder and Denise Lugo. Separately, further coverage of the Congressional hearing which we mentioned earlier this week relating to the Madoff scandal can be found in Madoff Probe Triggers Wider Probe of SEC, by David Katz in CFO.com. (We may post some additional observations on the hearing later this week as well.) For other news of interest to financial executives, visit FEI’s website, http://www.financialexecutives.org/.
READ MORE - FASB Votes To Issue Final FSP on Impairment- A 'Modest Clarification' - Not 'Amnesty'
Board members Tom Linsmeier and Mark Siegel dissented from issuing the guidance, due to concerns about due process and investor views. They noted such concerns were expressed by members of FASB’s Investors Technical Advisory Committee (ITAC) at its meeting yesterday, and in certain comment letters. (See also ITAC member Jack Ciesielski’s Dec. 28 post in his AAOweblog, "The 99-20 Hustle.”)
FASB staff told the board that a majority of the 346 comment letters received as of January 6 supported the proposed guidance. (Linsmeier pointed out that over 50 of those letters were essentially form letters.)
Board members also noted that the SEC, in its recently issued report to Congress on mark-to-market accounting, recommended that FASB consider guidance on impairment.
FSP is a ‘Modest Clarification,’ Not ‘Amnesty’
FASB Chairman Robert Herz voted in favor of issuing the final FSP, with certain clarifications noted below, as did board members Leslie Seidman and Larry Smith.
Herz and Smith agreed with Seidman’s characterization of the final FSP as a ‘modest clarification’ of 99-20. She added that by clarifying the board’s original intent, “I don’t think this represents amnesty on OTTI in the fourth quarter; it still requires assessment of the collectability of cash flows.”
Just because asset is performing currently does not mean it is not impaired
Seidman and Herz noted they were troubled by comment letters that said if the assets were still ‘performing’ on a current cash flow basis, there was definitely no need to take any impairment. Herz said that is not a correct application of existing literature, which includes various factors to be considered in determining if there is impairment, such as those factors enumerated in SEC SAB Topic 5-M . In part to address this concern, the board voted to add language to the FSP described below.
Additional Language to be Added to FSP
The board agreed to include additional clarifying language in paragraph 13 of the FSP, as shown in today’s board handout, as follows:
a. It is inappropriate to automatically conclude that a security is not impaired because all of the scheduled payments to date have been received. However, it is also inappropriate to automatically conclude that every decline in fair value represents an other-than-temporary impairment. Further analysis is often required to assess whether declines in fair value represent declines in the expected cash flows from the issuer of the security.
b. The holder must consider all available information, reflecting past events and current conditions, when developing the estimate of future cash flows. All available information would include the remaining payment terms of the instrument (which, for a security backed by nontraditional loans, could be significantly different from the payment terms in prior periods), economic factors that are relevant to the collectability of the instrument, such as current prepayment speeds, the current financial condition of the issuer(s) and the value of any
underlying collateral. [NOTE: FASB Chairman Robert Herz noted similar language appears in SEC SAB Topic 5-M.]
One concern noted by Linsmeier would be securities backed by commercial mortgages which are still performing, but that performance is based in part on the fact that the payments thus far require interest only, but a balloon payment looms in the future, and collateral in some cases has declined significantly. Herz replied it would not be sufficient to simply look to whether the assets are still currently ‘performing’ given the other factors that must be considered (such as those listed above) in determining impairment.
FSP To Include Broad Reminder of Existing Guidance, But Will Not Take on New Issues
The FSP will include, in the background section, either references to existing literature, or language taken from that existing literature, as to required considerations in impairment and related disclosures required. This will address the concern voiced by Herz that “after reading some of the [comment] letters, I felt the need to remind people, some of their assertions about the way current literature operates is not correct.”
Herz added, “I want to make sure you also [include] in [the FSP]... we remind [people] of the disclosures required by FSP FAS 115-1 and FAS 124-1 [The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments]." He also read directly from SEC SAB Topic 5-M which had language similar to that shown in item b. above.
FASB Technical Director Russ Golden said the FSP will include that information on those existing requirements for impairment accounting and disclosure, which makes it broader than just 99-20.
However, the scope of this particular guidance will not be broadened to address other fair value issues raised in some comment letters; some of those issues as described by staff (noted in the board handout) include questions relating to the definition of fair value, impairment 'triggers,' and other matters. The board declined to address those additional issues in this project, noting they have an expedited longer-term project already underway to address certain issues relating to financial instruments, and that the SEC asked FASB to consider certain issues such as potentially providing further guidance on fair value in illiquid markets, and that would potentially be addressed in other projects as well.
Due process
Golden noted that some members of FASB’s Investors Technical Advisory Committee (ITAC) and some comment letters said that FASB did not follow due process, e.g. by having such a short comment period on the proposed FSP. To address this concern, he said he will include in the background section of the final FSP some discussion about how FASB’s due process in getting constituent feedback goes beyond the comment letter process, and includes information learned at roundtables held by the SEC and FASB over the past year and by other interactions with constituents.
Effective date and transition; Timing of Issuance of FSP
As proposed, the FSP is effective for interim and annual reporting periods ending after
December 15, 2008, and applied prospectively. Based on comment letters received, in which some commenters asked FASB to expressly prohibit reversals of previous OTTI taken in prior periods, the board voted on January 7 to expressly prohibit retrospective application of the FSP. (Separately, one comment which the board chose not to address was regarding OTTI previously taken in regulatory reports filed by nonpublic banking institutions.) Golden said he would have a ballot draft to FASB board members this week, which will include Linsmeier and Siegel’s dissent. As noted in some board members' comments, companies would like to see this guidance issued very soon, to support their year-end earnings releases. Official summaries of the results of FASB board meetings are issued in FASB’s Summary of Board Decisions, generally published same-day or next-day in FASB’s News Center.
More FASB, SEC News
BNA’s Daily Report for Executives included well-written broad-ranging coverage of FASB issues, in the articles, FASB’s Herz Discusses Impact of Financial Crisis on Current, Future Projects, by Steve Burkholder, and Standard-Setters Face Continued Pressure; Financial Turmoil Sets Stage for 2009, by Burkholder and Denise Lugo. Separately, further coverage of the Congressional hearing which we mentioned earlier this week relating to the Madoff scandal can be found in Madoff Probe Triggers Wider Probe of SEC, by David Katz in CFO.com. (We may post some additional observations on the hearing later this week as well.) For other news of interest to financial executives, visit FEI’s website, http://www.financialexecutives.org/.
