Summary: The FASB amended the guidance for assessing impairments of financial assets in EITF Issue No. 99-20. But the final document included a formal dissent from two of the five members of the standard-setting body, who complained that the accounting change may do more to undermine investor confidence in the health of financial companies instead of shoring it up.

The FASB released the final version of a fast-track proposal that several investors opposed on January 12, 2009, FASB Staff Position (FSP) No. EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20. The guidance, which modifies Emerging Issues Task Force (EITF) Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, is effective for interim and annual reporting periods ending after December 15, 2008, and should be applied prospectively, the FASB said. Application to a prior reporting period is not permitted.

The amendment allows for the use of other-than-temporary impairment assessments established in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, for securities that had previously been subject to the impairment assessment under EITF Issue No. 99-20. SFAS No. 115 allows a reporting entity to assess an impaired security that is classified as either available-for-sale or held-to-maturity debt in order to determine whether the impairment should be recognized as other-than-temporary and recognized in earnings.

SFAS No. 115 gives management more discretion than EITF Issue No. 99-20, in deciding whether the loss is permanent. EITF Issue No. 99-20 required the use of market prices to assess the impairments of debt securities that are beneficial interests in some securitized financial transactions. Under the amended guidance, management can base the value it reports in the financial statements on its judgment of its ability to collect all the contracted amounts due.

At a January 7 FASB meeting, some Board members said that the new guidance does not mean that a security can be marked at its amortized historical cost and not its fair market value simply because all scheduled payments have been received up to that point.
FSP No. EITF 99-20-1 says, “Further analysis and judgment are required to assess whether a decline in fair value indicates that it is probable that the holder will not collect all of the contractual or estimated cash flows from the security.”

The guidance further says that “the longer and/or the more severe the decline in fair value, the more persuasive the evidence that is needed to overcome the premise that it is probable that the holder will not collect all of the contractual or estimated cash flows from the security.” Information about past events, current conditions, and reasonable and supportable forecasts are all considered evidence that should be incorporated into management's judgment.

Two FASB members, Thomas Linsmeier and Marc Siegel, dissented on the approval of the final document and questioned its value to investors, according to the FSP. “Investors are exhibiting a current lack of confidence in financial statement information prepared in conformity with current GAAP, as demonstrated by the high percentage of bank stocks that have market valuations below their tangible book values,” said the FSP, summarizing the objections of Linsmeier and Siegel. “As a result, these investors favor valuing all financial instruments at fair value through net income and believe this FSP represents a step away from that goal by failing to require that all changes in the reported fair values of Issue 99-20 assets be recognized in income.”

Linsmeier and Siegel also questioned the wisdom of allowing financial institutions to make assumptions about being able to withstand market conditions, given the recent history of many of these financial institutions and the unprecedented nature of the financial crisis. “The Statement (SFAS No.) 115 impairment model is primarily based on assessments about both the ability to collect cash flows of individual instruments and the ability to hold those individual instruments to recovery,” according to the summary of the dissenting view. “In contrast, the rapid disappearance of certain financial institutions that appeared able to hold such instruments to recovery has reduced investors’ confidence in whether impairments are not being recognized in earnings based on questionable assertions that the entity can withstand market conditions for a sufficient time period to recover the estimated cash flows.”

Perhaps most ominously, the FSP sets the FASB on a course for other changes that investors may view as harming the quality of financial reporting and undermining confidence in the standard-setting process. In the opinion of Linsmeier and Siegel, “this FSP could increase pressure place on standard setters and regulators to make additional emergency changes to the accounting models for financial instruments. . . This short-term project does not sufficiently improve financial reporting to merit its issuance, especially on an expedited basis.”

Other final pronouncements on U.S. GAAP have incorporated dissents from FASB members, but the dissenting opinions are usually reserved for high-level statements. Dissents are used less often with interpretative statements that clarify implementation issues with high-level guidance.

Source: WG&L Accounting & Compliance Alert Checkpoint 1/14/09