Corporate & Securities Law

By Jim Hamilton

Responding to intense congressional pressure to act, the FASB proposed two staff positions intended to provide additional guidance regarding fair value measurements and impairments of securities. Proposed FAS 157-e will help in determining whether a market is inactive and will make fair value measurements more consistent with the principles presented in FASB Statement No. 157. Proposed FAS 115-a, FAS 124-a, and EITF 99-20-b will provide additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. The accelerated comment deadline on the guidance is April 1; and FASB has scheduled a meeting for April 2 to consider the comments.

Statement 157 provides a framework for measuring fair value and a definition of fair value that contemplates an orderly transaction between market participants, not a forced or distressed sale. In the current economic crisis, many constituents have requested additional authoritative guidance to assist them in determining whether a market is active or inactive, and whether a transaction is distressed. Proposed FAS 157-e would provide this application guidance.

Proposed FAS 115-a, FAS 124-a, and EITF 99-20-b on other-than-temporary impairments (OTTI) are intended to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to more effectively communicate when an OTTI event has occurred. As proposed, they would apply to both debt and equity securities. The proposal requires separate display of losses related to credit deterioration and losses related to other market factors on the income statement. Market-related losses would be recorded in other comprehensive income if it is not likely that the investor will have to sell the security prior to recovery.

Meanwhile, Rep. Spencer Bachus (R-Ala), the Ranking Member on the House Financial Services Committee, sent a letter to SEC Chair Mary Schapiro urging the Commission to adopt common sense accounting changes so companies can value assets by their real worth, not at an artificially depressed value. The SEC issued a report last December recommending these adjustments, he noted, but has yet to act on the suggestions.

Action to provide relief from the negative effects of mark-to-market accounting is long overdue, said Rep. Bachus, adding that prudent relief from these accounting rules must happen now. Congress is particularly concerned that the SEC and the FASB lack a sufficient sense of urgency in addressing the negative impact of mark-to-market accounting rules in the current economic environment. If FASB does not act quickly, he said, the SEC should force FASB to act or the Commission should act itself. He also agreed with Fed Chairman Bernanke?s statement that mark-to-market accounting rules may be contributing to an unnecessary tightening of credit in the markets.

While Congress normally believes that accounting standard setting should be left to the private sector, there is a feeling that mark-to-market accounting has exacerbated the financial crisis. If the regulators do not act to prevent the gross distortions that the standard has caused, House leaders believe that Congress should intervene.

Recently, Rep. Barney Frank (D-MA), chair of the Financial Services Committee, said that mark-to-market accounting must reflect realism and allow for flexibility. If an asset class has always been held to maturity, the standards should permit the financials to reflect that. He urged regulators and standard setters to let Congress know if there are any legislative changes that should be made to give them the discretion they need to improve mark-to-market accounting.
As the Committee begins to work on modernizing the regulatory structure, Rep. Bachus wants to examine how to reform FASB and the accounting standard-setting process to better meet the needs of all investors and market participants. The Ranking Member wants to see nimble and dynamic regulators in times of crisis.

Full post as published by Jim Hamilton's World of Securities Regulation on March 19, 2009 (boomark / email).