Figueredo: FASB Changes Will Affect Both Large and Small Business

The Financial Accounting Standards Board’s (FASB) proposed changes to fair value accounting will affect more than just big business, says Daniel Figueredo, a Manager at Burr Pilger Mayer, a San Francisco-based accounting and consulting firm. In an article published in Smart Business — Northern California, Figueredo explains that while the new fair value accounting rules will greatly increase transparency in accounting, businesses should not underestimate the amount of work required in preparing financial statements.

“The new standards in the exposure draft will help converge the U.S. generally accepted accounting principles (GAAP) with international financial reporting standards (IFRS),” says Figueredo. “It’s a pretty robust draft with many new disclosure requirements. If it’s issued as is, it will be challenging for businesses.”

The most significant changes will come from a requirement to report a sensitivity analysis, quantifying the volatility of “Level 3” fair value measurements, which are things like mortgage-backed securities that require the most judgment of value.

Figueredo explains the challenges: “It is not information that is readily available, and it is very judgmental. It will require significant time to be incurred, especially for companies that have a significant number of level 3 assets and liabilities…[such as] a financial institution.”

Investors and business have until September 7^th to submit comment letters to the FASB.

Alternative Funds Wary of Fair-Value Changes

The new Financial Accounting Standards Board (FASB) proposals for fair-value accounting has managers of alternative funds – private funds such as private equity and venture capital – wary of tougher rules. Under the new proposal, managers of these funds would be subject to more stringent requirements on explaining and reporting how an asset is valued.

John Hildebrand, a partner with PricewaterhouseCoopers, explained to Pensions and Investments that private equity funds are generally valued on “internally developed information or…unobservable inputs,” resulting from a manager’s best estimate. The FASB’s proposal would require a transparent valuation practice, which many private equity managers are reluctant to adopt.

Mr. Hildebrand said that the fear among alternative fund managers is the exposure to legal issues resulting from disagreements about how they value certain aspects of funds. Additionally, fund managers say they are unclear on how the FASB would require them to apply the standards and make the calculations, and that compliance with the new rules will require a significant amount of work on their part.

Banking Industry Adds Email Campaign to Oppose FASB’s New Proposal

The American Bankers Association recently launched an email campaign seeking support among the investor community for their opposition to the Financial Accounting Standards Board’s proposal to expand fair-value accounting to include loans as well as securities.

In a message sent to at least 15,000 investors, Washington-based ABA encouraged them to become involved in the opposition. The email included a link to their website, where recipients found “Guidance for Investors Regarding FASB’s Mark-to-Market Proposal,” along with an example letter to the FASB. On the web page, the ABA encourages investors to write their own letter as opposed to copying the form letter, as “the FASB does not appreciate ‘form’ letters, and often discounts them in their analysis.”

The American Bankers Association says that opposition to the new FASB proposal is necessary to keeping the banking industry’s business models intact, and that the new rules would make strong banks such as Citigroup Inc. and Wells Fargo write down billions of dollars in assets and appear undercapitalized.

FASB Hires Mark Schroeder to Oversee New Standards

The Financial Accounting Standards Board announced on July 14 that they had hired Mark Schroeder as a post-implementation review leader in light of the upcoming rules and standards changes. Schroeder (now a retired senior partner at accounting firm Deloitte & Touche), in addition to his role at the FASB will have a similar position for the Governmental Accounting Standards Board.

This is another large step by the FASB to formalize its review process, especially in light of the new rules on mark-to-market accounting. Banks and investors alike had cried foul against the FASB, saying that the new mark-to-market accounting rules contributed to freezing the credit market in 2008 and 2009 and there was no formal process for review.

In 2008, an advisory committee to the US Securities and Exchange Commission recommended that the FASB establish a formal review process once the rules were established.

Volcker: IASB and FASB on Collision Course

Speaking at the International Organization of Securities Commissions conference this week in Montreal, White House senior economic adviser Paul Volcker appealed to the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to come together in their financial instrument reforms.

“What appeared to be two organizations converging…now looks like a collision,” said Volcker. The FASB favors mark-to-market; the IASB has a mixed-measurement model in place which enables banks to measure their held-to-maturity instruments at amortised cost.  If the two groups cannot reach agreement on this issue and others by June 2011, it may jeopardize US adoption of international standards.

With the deadline for an agreement looming, Volcker added, “I hope they can come together by the end of the year.”

First United Chairman Blasts FASB

In a recent letter to shareholders filed with the Security and Exchange Commission (SEC), First United Chairman and CEO William B. Grant addressed the company’s “first annual loss in memory” of $12.8 million. 2009 was the bank’s worst showing in 75 years.

Grant recognized expanded lending in hospitality, insurance and other sectors new to the bank’s portfolio as well as ill-advised real estate investments as the primary culprits. He noted that most of the losses came from “trust-preferred securities” in banks and insurance companies that defaulted on or deferred their obligations.

But he also blasted the “controversial accounting guidance” of the Financial Accounting Standings Board (FASB), taking special aim at mark-to-market accounting. He felt its requirement to recognize the hypothetical losses of potential assets provided an unfair “challenge” to First United and other institutions.

If everything was mark-to-market, you really couldn’t run the bank at anything else than a quarter-to-quarter basis. Short-term loans and short-term liabilities are the only way to ‘manage’ mark-to-market.