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By Ronald Fink
The Financial Accounting Standards Board has proposed to set in stone the relief it granted banks earlier this year from its fair-value reporting rules.
The accounting standards setter proposed yesterday to make permanent the ability of banks and other publicly traded companies to avoid reporting losses on their income statements from loans and other financial assets, even if the banks intend to hold them to maturity or classify them as available for sale.
Instead, FASB would allow banks to report losses on all assets (except those that banks intend to trade) in "other comprehensive income" on their balance sheets. Barring that, banks could avoid a loss on these loans or assets by recording them at historical cost.
Prior to the change, losses on all assets that were subject to fair value accounting or impairment testing had to be reported on the income statement.
Following yesterday’s announcement that the board intends to make the change a permanent part of Generally Accepted Accounting Principles, “a lot of us accounting geeks are running around with our hair on fire,” said a partner of a Big Four accounting firm who asked not to be identified. “It caught a lot of us by surprise.”
FASB spokesman Neal McGarity pointed out that the proposal is subject to debate and change.
“There’s a long process ahead for this,” McGarity told CFOZone. “Nothing’s been decided.”
In January, the board granted temporary relief from the fair-value rules after heavy lobbying from bank regulators. The board allowed the exemption despite a study by the SEC in 2008—mandated by Congress as part of the banking bailout—that showed that fair-value accounting was not to blame for banks’ financial troubles, contrary to what many lobbyists claimed. And regulators such as former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke publicly defended the rules as necessary to maintain investors’ confidence.
Nonetheless, unidentified bank regulators leaned on the board to grant the banks’ relief, according to the transcript of a FASB meeting in December when the change was initially proposed. Despite opposition from groups representing analysts and investors, some FASB members apparently felt they had no choice but to go along.
“I think we’re talking about this because [SEC] Chairman [Christopher] Cox suggested at the AICPA meeting last week that the SEC sees fair value as an area we should be looking at,” said FASB member Thomas Linsmeier during the meeting, in reference to the chairman of the commission at the time. “I am greatly concerned that the reason we’re getting pressure to do this is the preparer community doesn’t want to recognize losses.”
The FASB is a private body that is supposed to be independent of political influence. But Conrad Hewitt, the SEC’s chief accountant at the time of the board's change to fair value, had earlier threatened to withhold approval of FASB’s budget unless its overseer, the Financial Accounting Foundation, let the commission vet board nominations. Hewitt claimed that that the SEC was authorized to do so under the Sarbanes-Oxley Act. Critics said the law grants the agency no such authority.
A formal proposal for the change in GAAP announced yesterday is slated for release by year end. Some experts predict it will generate a lot of controversy.
“This proposal represents a significant change to the existing fair value accounting model and substantial debate is expected,” Mark Brockwell, a partner in PricewaterhouseCoopers, said in a note to clients following the announcement.
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