In his “Open Letter to the Financial Accounting Standards Board (FASB),” financial analyst and mutual fund owner John Hussman criticized the FASB’s decision to back off of its proposal that would have applied mark-to-market accounting to a broad range of financial instruments. Hussman, who is known as one of the few analysts who warned of an economic collapse well before the financial crisis, has frequently spoken out against the board.
Hussman rails against the move back to amortized cost in the letter, saying that the board ignored a procedure that would require and produce an adequate valuation due to banking industry pressure. “The FASB is a standards board. You are not running a popularity contest,” he says. The letter claims the FASB has shifted its focus to serving the banking industry insiders, and not the general public and investment community who rely on the board to apply fair standards.
The letter can be reviewed here: http://www.hussmanfunds.com/wmc/wmc110228.htm
(FASB) has stepped into the private sector as senior advisor at WebFilings, a company that provides technology for SEC financial filings. The technology startup, based in Palo Alto, CA and Ames, IA, also lists Eugene S. Katz, a retired partner and board member at Herz’s old firm PricewaterhouseCoopers, as a member of its senior advisory board.
Herz, who abruptly retired last autumn two years before the end of his term at the FASB, is best known for controversial proposals to accounting standards, most notably his proposal to require that financial instruments such as bank loans be reported at fair value. The FASB, now chaired by Leslie Seidman, has taken a more accommodating approach due to significant public comment against Herz’s proposal.
Even in the private sector, Herz remains very interested in accounting policy. His desire to streamline the process using technology is well noted. “I’ve long been an advocate of making better use of technology in the financial reporting process,” Herz said in a statement. He continued, “The WebFilings collaborative solution is a huge leap forward for financial reporting — a pioneering technology platform that takes a holistic approach to streamlining financial reporting.”
In another concession to public opinion and to ease transitions and merging standards with the International Accounting Standards Board (IASB), the United States-based Financial Accounting Standards Board (FASB) retreated on a controversial proposal that would require leases to be noted on corporate balance sheets.
Acknowledging that not all leases are necessarily created equal, both the FASB and IASB may now consider two categories of leases, something that would resemble today’s operating leases and capital leases, says Tammy Whitehouse of Compliance Week. The move also backs away from a proposal that would have changed the way that companies account for renewal options leading to variable lease payments. This proposal would have required companies to do a significantly higher level of projecting lease terms and renewals, raising questions about uncertainty and undue burden on companies.
This is a similar reevaluation to the fair value proposal for financial instruments, which the FASB pulled back on recently. That proposal would have required banks and other financial institutions to report most financial assets and liabilities at fair value. Like the lease accounting proposal, overwhelming negative comments from the public and investment communities, most calling it an undue stress on companies, urged the FASB to back away from the proposal.
One year ago, the Financial Accounting Standards Board (FASB) had set a target completion date of June 2011 for nine projects that would aid the convergence with International Accounting Standards Board (IASB) rules. The FASB has now been sending signals that this may have been an unattainable goal, targeting five projects that will adhere to this timeline, most notably fair value application of financial instruments.
The FASB originally proposed that most financial instruments be measured at fair value, noting gains and losses as a result of this application on either net income or other comprehensive income. The public comment period yielded nearly 3,000 letters – most opposed the FASB model.
Though the FASB has backed off of its fair value proposal in favor of amortized cost, revisions to accounting for financial instruments and accounting for impairment of financial instruments remain a likely area of change, as noted by Paul Munter, CPA, in his article in Financial Executive Magazine. “Closely linked to the boards’ financial instruments project are those on the projects on netting of financial instruments and derivatives and presentation of other comprehensive income,” he says. United States Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS) currently differ, and will have to be equalized before a standards conversion can happen, especially on the June 2011 timeline.
The Financial Accounting Standards Board (FASB) recently rescinded its proposal to apply mark-to-market accounting to a vast array of financial instruments, an unpopular proposal from the banking industry’s perspective. But, as Bill Bradway points out in his editorial for Bank Systems & Technology, the issue is far from dead. Bradway explains that traded instruments such as actively traded loans and securities will still follow mark-to-market accounting. Loans that are held to maturity will use the amortized cost.
Generally, banks are relieved, but not free of mark-to-market entirely. Bradway explains, “Distressed real estate that is in some form of extended default (say past 90 days due) or foreclosure is still eligible for the collector’s version of mark to market. What is the property worth to a buyer?”
Bradway warns that investors will have to “raise their due diligence on banks with a meaningful basket of troubled or non performing loans.” Publicly held banks are much easier to analyze than smaller community banks in this regard, as problems on a loan portfolio level have not yet hit their default status, quickly turning the bank’s assets sour. “The broader economy will benefit simply because the biggest banks, which drive the market, will not be distracted or forced to make severe mark-to-market write downs at a critical time in this recovery’s cycle,” says Bradway.
In a recent survey conducted by Grant Thornton, 37% of U.S. CFOs and senior controllers agree with the Financial Accounting Standards Board (FASB) proposal that a balance sheet should display both the fair value (exit value) and amortized cost of assets. Whereas 37% prefer just reporting amortized cost and the remaining 26% favored fair value only.
Of the 496 respondents, only 5% agree that the income statement should reflect the change in fair value. Instead 66% believe the income statement should only reflect revenues when earned and the corresponding costs.
Grant Thornton Professional Standards partner John Hepp explains, “The data indicate that there is support for fair value accounting on the balance sheet, but not on the income statement.” He continues, “This echoes comment letters from constituents that have called on the FASB and the IASB (International Accounting Standards Board) to clarify how to present changes in fair value and the principles underlying other comprehensive income.”
This is so simple it defies conventional wisdom. 1) Disclose both. 2) Don’t take a hit to income until sale.
See the link below for comments on the FASB recommendation for “fair value” accounting for level 3 assets. Over 750 response letters so far. Lots of energy on this topic, and rightfully so!
The FASB’s recommendation is to fair value all assets on the balance sheet.
This is an incredibly bad idea. This will lead to an increase in asset repricing frequency, which leads to a short term holding mentality. Banks will hesitate to lend long-term if they know that shortly after they make a loan, they could be forced to mark the loan down to its “market value.”
Going hand in hand with this is that short-term market value write-downs – on long-term assets – will decrease capital at banks, which will in turn decrease their capacity to lend.
We want longer management of longer term assets. Let financial institutions carry assets at whatever level they fully disclose, and force them to footnote the “market value.” Full disclosure will provide investors with all of the information they need to make decisions. This improves disclosure and transparency without draining capital out of the banking system.
Lobbyists and bank CFOs have been voicing their opposition to the Financial Accounting Standards Board’s new exposure draft on accounting for financial instruments. They warn that it could have adverse consequences for commercial banks.
“This is really a jaw-dropping proposal,” says Donna Fisher, senior vice president of tax and accounting at the American Bankers Association.
Bankers have taken particular issue with the requirement that even “plain vanilla” loans held for collection be marked to market. They believe this runs the risk of damping origination of long-term, variable-rate loans, as well as scaring off bank investors and increasing procyclicality in the financial system.
In an effort to ease the transition proposed by the exposure draft, the Board will give nonpublic banks with less than $1 billion in total consolidated assets an additional four years to adopt the new fair value accounting requirements
Sir David Tweedie, head of International Accounting Standards Board (IASB), believes that the impasse with the Financial Accounting Standards Board (FASB) regarding fair value accounting rule can be reconciled. Currently the IASB model uses a mixed measurement approach for valuing assets, whereas the FASB is proposing to measure assets at their full fair value.
In an interview with the Journal of Accountancy Tweedie says, “Say we both stick to our same positions [on classification and measurement], maybe we need to put out something that would say ‘if you want to get the same other comprehensive income as FASB, you have to add this on, which would be the fair value’” he said. “FASB would do the opposite. If you want to get the FRS number, you deduct this. There are ways to do it.
The IASB has split its accounting rules reform project into three phases. The FASB has chosen to release all its reforms at one time.
What’s the rush for Zoll? Let’s do it right instead.
In a telephone interview with Bloomberg Businessweek, William Isaac commented on the proposed Financial Accounting Standards Board (FASB) mark-to-market accounting rules. These would require banks to report both the fair value and amortized cost of loans and some other financial assets and liabilities on their balance sheets.
“This is a terribly destructive idea to even propose,” said Isaac. He believes that simply by making the proposal, the FASB will cause banks to quit making loans that do not have a clear market value and keep those whose value can be easily discerned to shorter maturities.
Isaac contends that mark-to-market accounting destroyed $500 billion of bank capital as traders marked down all assets during the crisis by a total of 27 percent. Only recently have many of those values returned to near par. “Now FASB is going to spread this disease throughout the system,” he said.
Bill Isaac is right. He has been on both sides of this fence. We should listen to him.