Tuesday, January 6, 2009

SEC/FASB Fair Value and Impairment Changes

Jack Ciesielski has carved out a stronly-worded opinion on the FASB's suggested fast-track changes the banking industry lobbied the SEC for, i.e. more lenient rules on recognizing losses on CDOs and other securities causing the financial crisis last fall.

"There's still time to comment on the FASB's rapid-transit
amendment of the impairment model embodied in EITF Issue No. 99-20. To put it in a nutshell: the existing rules will require companies having a decline in value for things like lower-rated securitizations, whether held by issuers as a retained interest or purchased outright, to look at the cash flows a marketplace participant would use in evaluating the cash flows of the instrument. The impairment charge can then be determined. The FASB would like to replace that test with a more judgment-based model embodied in Statement 115, at the request of the SEC. "

"Is it an improvement? I don't believe it is; in fact, I think it would be quite likely for impairments on securities covered by the amendment to be recognized later rather than sooner. Sure, the banks would like that - but I don't think that's giving investors timely or realistic information for investing decisions. I've put together my own comment letter, appearing below. I would recommend that even if you can send just a brief email on the subject to the FASB email-box, you should do so. Avoiding a reckoning on the values of these instruments is not the same thing as a reckoning; you'll be doing yourself a favor in the long run if firms are reporting their troubles honestly in the present. "

December 28, 2008

Russell G. Golden
FASB Technical Director
Financial Accounting Standards Board
P.O. Box 5116
Norwalk, Connecticut 06856-5116

Re: Proposed FSP EITF 99-20-a

Dear Mr. Golden:

I am writing in regard to the Proposed FSP EITF 99-20-a, “Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20.” I do not support the issuance of this amendment for the following reasons.

• The existing No. 99-20 impairment model embodies marketplace participant points of view in determining whether or not an impairment exists. The model is consistent with the principles of FASB’s Concept Statement No. 7, “Using Cash Flow Information and Present Value in Accounting Measurements,” and also with those contained in Statement No. 157, “Fair Value Measurements.” The information it provides investors is a faithful representation of current economic values. The impairment model embodied in Statement 115 is far less prescriptive and invokes much more preparer judgment.

This project originated because the banking industry lobbied the SEC for more lenient rules on recognizing losses on some of the worst-faring securities created during the housing boom.
Moving to a Statement 115 model will not provide better information to investors than the current impairment model, and in fact, could lead to delayed recognition of impairments.

At a time when the American auditor is facing some of its most serious professional challenges since the early part of this decade, the FASB will hobble them in their dealings with clients by replacing an impairment model that currently works with one that leaves plenty of room for management discretion. Ordinarily, that wouldn’t be necessarily wrong - but given the current economic environment and the genesis of this project, it certainly portends a negative outcome regarding the information to be provided to investors.

• I believe the Board has its priorities reversed on this project. If a Level C standard (No. 99-20) produces information more consistently representative of fair values than the Level A standard (Statement 115), then it would seem that there is a problem with Statement 115.

If fair value reporting provides investors with the information they need to make investment decisions, then why should the Board engage in projects that decrease the information provided to investors?

Instead of diluting the information provided to investors by Issue No. 99-20, the Board would do better by investors - whom it is ostensibly serving, rather than preparers - to study the shortcomings of Statement 115. In fact, the whole idea of “other than temporary impairments” should be reconsidered through the expansion of fair value accounting for financial instruments. If full fair value accounting for financial instruments existed, there would be no need for artificial categorizations like “held-to-maturity” and “available-for-sale” securities - and no need for other-than-temporary impairment testing.

• The Board has engaged in a mere facade of a due process. An 11-day comment period for a project with this much potential reporting impact like this one is a mere sham.

Take into account the religious and national holidays during those eleven days and this amendment’s due process takes on the trappings of a parody.

At least the Board went through the motions of a due process, unlike the IASCF and the IASB when they amended IAS 39 last October.

In closing, I would like to support the Board in simplifying the accounting literature in trying to remove multiple impairment models and other possible redundancies in the accounting literature. There is that minor benefit to this project, but at too great a cost to investors.

I would support that notion, however, only if the actions taken were more comprehensive and not on a piecemeal basis that serve to benefit one group at the expense of investors.

That concludes my comments. If you have any questions, please don’t hesitate to contact me. Best regards.

Jack Ciesielski

From the Analyst's Accounting Observer

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