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FASB 1576/3/09 - Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets. Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter. The accounting issue lies at the heart of the financial crisis: Are the hardest-to-value securities worth no more than what the market is willing to pay, or did the market grow too dysfunctional to properly set values? Backers of the change say it was necessary because existing accounting rules never contemplated the kind of market turmoil that unfolded last year. But when markets went haywire last fall, financial firms complained that the rules forced them to slash the value of many assets based on fire-sale prices. That contributed to big losses that depleted their capital and left several of the nation's largest firms on the brink of failure. Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million lobbying Washington. During a March 12 hearing before the House subcommittee, FASB came under intense pressure from committee members. Rep. Kanjorski said that if the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself. FASB made speedy revisions to its rules. The change helped turn around investor sentiment on banks. Financial firms had the option of reflecting the accounting change in their first-quarter results; they will be required to do so in the second quarter. Wells Fargo said the change increased its capital by $4.4 billion in the first quarter. Citigroup said the change added $413 million to first-quarter earnings. The Federal Home Loan Bank of Boston said the shift boosted its first-quarter earnings by $349 million. The American Bankers Association acknowledges that it exerted pressure to change the rules. The lobbying plan began taking shape last year. Stock and bond markets were tanking. Lehman Brothers collapsed in September. Some markets seized up, including those for mortgage securities. Investors worried that some banks and other financial firms might not survive if they didn't begin posting profits in 2009. Lawmakers were growing more concerned about the problems spreading. Federal regulators were forced to guarantee billions of dollars in uninsured deposits at credit unions, which are member-owned cooperative banks. The Federal Home Loan Banks -- cooperatives owned by more than 8,000 commercial banks, thrifts, credit unions and insurers -- took billions of dollars in write-downs on their mortgage securities. On Feb. 18, FASB said it didn't expect to complete its examination of mark-to-market standards until the end of June. Banks, credit unions, Federal Home Loan Banks and insurance company trade associations launched in late February what they called the Fair Value Coalition. On March 5, Reps. Perlmutter and Lucas introduced legislation to broaden oversight of FASB, putting it under the purview of not only the SEC, but also the Federal Reserve Board, Treasury Department, Federal Deposit Insurance Corp. and the Public Company Accounting Oversight Board. Four days later, the Fair Value Coalition wrote to Barney Frank. The letter, signed by 31 institutions and trade groups, called on Congress to use the hearings to address the unacceptable pace of FASB and to correct the unintended consequences of mark-to-market accounting. Rep. Kanjorski scheduled a hearing on the issue for March 12. Bank lobbyists jammed a congressional hearing room. In his opening remarks, Rep. Kanjorski threatened that Congress would get involved if FASB didn't act. Rep. Perlmutter said mark-to-market accounting was 'exaggerating and multiplying' the economic slump. Rep. Gary Ackerman and Rep. Kanjorski pushed Mr. Herz to agree to a speedier timetable. They repeatedly cited Rep. Perlmutter's legislation to broaden oversight of FASB. On April 2, FASB introduced the changes that lawmakers sought. FASB changed its rules to say that if financial firms could proove markets were dysfunctional they could use internal models to set values, rather than market prices. FSP FAS 157-4 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly 4/9/09 - The FASB Staff Position (FSP) provides additional guidance for estimating fair value in accordance with FASB 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. On 10/3/08 the Emergency Economic Stabilization Act of 2008 was signed into law. Section 133 of the Act mandated that the SEC conduct a study on mark-to-market accounting standards. On 12/30/08 the SEC presented to Congress its report. One of the recommendations in the study stated that “additional measures should be taken to improve the application and practice related to existing fair value requirements.” In the Board’s view, a significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be determinative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. A reporting entity should evaluate the following factors to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity for the asset or liability. The factors include, but are not limited to:
A reporting entity shall evaluate the significance and relevance of the factors to determine whether, based on the weight of the evidence, there has been a significant decrease in the volume and level of activity for the asset or liability. If the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability, transactions or quoted prices may not be determinative of fair value. Further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with FASB 157. When weighting indications of fair value resulting from the use of multiple valuation techniques, a reporting entity shall consider the reasonableness of the range of fair value estimates. The objective is to determine the point within that range that is most representative of fair value under current market conditions. Determining the price at which willing market participants would transact at the measurement date under current market conditions if there has been a significant decrease in the volume and level of activity for the asset or liability depends on the facts and circumstances and requires the use of significant judgment. 10/2/08 - Accounting firms and investors groups put up a united front in opposition to changing FASB 157, which requires the "marking down of assets" to fair market value. "Suspending fair value accounting during these challenging economic times would deprive investors of critical financial information when it is needed most," said the Council of Institutional Investors, Center for Audit Quality and CFA Institute in a joint statement. "It would not help solve our economic difficulties." Some members of Congress say easing the mark-to-market rules could help taxpayers avoid billions of dollars in potential costs by allowing banks to avoid booking losses on securities that might have value after the credit-market crisis has passed. The Treasury, Federal Reserve Bank, accounting firms and some bankers say that divorcing the value of assets from their true market price can lead to an artificially rosy picture of a company's financial health. Inflated asset prices, they warn, helped to contribute to the S&L collapse in the U.S. -- which inspired the mark-to-market rule -- and a decade-long economic slump in Japan in the 1990s. 10/1/08 - The SEC and FASB said they would give the financial industry some relief from marking hard-to-value assets down to fire sale prices on their balance sheets. The announcement would allow U.S. banks to incorporate the changes in their next round of financial statements. Up until now, U.S. banks have had to "mark" certain assets and, as a result, take significant write-downs on what has been commonly characterized as Level 3 assets. FASB 157 defines "fair value" as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. In a document, the SEC reaffirmed that management's internal assumptions can be used to measure fair value when relevant market evidence does not exist. The SEC statement notes that "distressed or forced liquidation sales are not 'orderly transactions'." Under section 132 of the proposed Emergency Economic Stabilization Act of 2008, the SEC has the authority to suspend the application of FASB 157 if the SEC determines that it is in the public interest and protects investors. FASB 157 Fair Value Measurements Original Statement This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. This Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, this Statement establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort. This Statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability, even if the adjustment is difficult to determine. Therefore, a measurement (for example, a “mark-to-model” measurement) that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one in pricing the related asset or liability. This Statement clarifies that market participant assumptions also include assumptions about the effect of a restriction on the sale or use of an asset. A fair value measurement for a restricted asset should consider the effect of the restriction if market participants would consider the effect of the restriction in pricing the asset. That guidance applies for stock with restrictions on sale that terminate within one year that is measured at fair value under FASB 115 and FASB 124. This Statement clarifies that a fair value measurement for a liability reflects its nonperformance risk (the risk that the obligation will not be fulfilled). Because nonperformance risk includes the reporting entity’s credit risk, the reporting entity should consider the effect of its credit risk (credit standing) on the fair value of the liability in all periods in which the liability is measured at fair value under other accounting pronouncements, including FASB 133. This Statement affirms the requirement of other FASB Statements that the fair value of a position in a financial instrument (including a block) that trades in an active market should be measured as the product of the quoted price for the individual instrument times the quantity held (within Level 1 of the fair value hierarchy). The quoted price should not be adjusted because of the size of the position relative to trading volume (blockage factor). This Statement extends that requirement to broker-dealers and investment companies within the scope of the AICPA Audit and Accounting Guides for those industries. This Statement expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs (within Level 3 of the fair value hierarchy), the effect of the measurements on earnings (or changes in net assets) for the period. This Statement encourages entities to combine the fair value information disclosed under this Statement with the fair value information disclosed under other accounting pronouncements, including FASB 107. The guidance in this Statement applies for derivatives and other financial instruments measured at fair value under FASB 133 at initial recognition and in all subsequent periods. Therefore, this Statement nullifies the guidance in EITF 02-3. This Statement also amends FASB 133 to remove the similar guidance to that in Issue 02-3, which was added by FASB 155. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. |
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