The Financial Accounting Standards Board isn't waiting for the planned appointment of two new board members to pursue its ambitious agenda of rule changes, including several with big implications for banks.
Leslie Seidman, the FASB's acting chairman, said Monday that the board will "continue working through" its top-priority projects — including a proposal to mark loans, deposits and most other financial instruments to fair value — even as the search for board recruits goes on.
Speaking at a Financial Executives International conference in New York, Seidman said that several candidates "already have been identified" and should be able to get up to speed quickly as the foundation that oversees the FASB expands the board from five members to seven. The new members are expected to be seated by early 2011.
"There's always the possibility that if they're not familiar with these topics, or do not feel ready to vote, that they will abstain," Seidman said. She reminded the audience that she was among two board members to join the FASB during a flurry of activity in 2003, when the board was considering key topics including accounting for stock compensation and business combinations.
The former J.P. Morgan & Co. accounting policy executive did not tip her hand as to how the FASB would vote on its closely watched financial instruments proposal, which, most controversially for banks, would make fair value the de facto standard for measuring assets and liabilities. But she said there was no change to the FASB's goal of sorting out its final rule by June 2011.
The FASB received more than 2,800 letters during the public comment period for the proposal that ended Sept. 30, "and I must say, most of it wasn't fan mail," Seidman said.
Banks have broadly objected to the proposal, arguing that abandoning the amortized-cost model they currently use for loans held to maturity would unfairly subject their valuations of core, long-term assets to the vagaries of the market.
Seidman was in the minority on several of the 3-to-2 votes resulting in the release of the FASB's proposal. She has expressed a preference for using amortized cost-based accounting for instruments such as loans that banks intend to hold to term.
In addition to reading the comment letters, the FASB spoke directly with more than 100 investors to better understand their positions on the proposal. Though Seidman said there was "widespread agreement" that fair-value measurements appear somewhere within companies' financial statements, "nearly all disagree that loans, deposits and an entity's own debt should be marked at fair value on the balance sheet."
But another key topic in the proposal seems destined to move to the front burner first: the impairment of debt and equity instruments. Seidman said that given the broadly shared interest in finding the right way to recognize impairments, "it's absolutely critical that we take this one to the mat" and come up with a solution.
The FASB and its international counterpart, the International Accounting Standards Board, which together are trying to develop uniform reporting standards around the globe, already have held several meetings this month on the impairment issue. In addition to the keen interest that statement preparers have in the topic, "it offers the greatest prospects for a converged solution at this point in time," Seidman said, while "the move into the measurement of financial instruments [will come] a little later in the process."
The IASB has proposed that companies consider expected changes in credit and economic conditions over the life of an asset to determine credit impairment for that asset. The FASB, meanwhile, would have companies determine the collectibility of contractual cash flows based on past and present conditions, not expected conditions in the future.
On a separate FASB proposal regarding fair-value measurement, which among other things would have companies disclose more about the sensitivity of their measurements for hard-to-value assets, Seidman said the FASB expects to issue final guidance during the first quarter.
The FASB has proposed that companies disclose the effect that different, plausible inputs would have on the value of their so-called Level 3 assets, so that investors can see the range of possible valuations for the assets. Comments on that proposal were due Sept. 7.
Seidman said some of the comments on that proposal offered up alternatives that would satisfy many of the board's objectives in ways that might be less onerous to companies. She said those alternatives would be examined during the board's follow-up deliberations on the issue.
Regarding the more controversial proposal, the one that would apply fair value to most financial instruments, a panel of accounting experts in a separate session at the conference raised doubts that the final rule would closely adhere to the draft issued in May.
"I cannot believe the FASB could proceed with their proposal" as it currently stands, said Greg Jonas, a managing director at Morgan Stanley who specializes in accounting, reporting and taxation matters. "There's just too much serious, serious opposition."
Esther Mills, the president of the advisory firm Accounting Policy Plus, said that given the deluge of criticism that the proposal attracted, "FASB is really pretty much going back to the drawing board." But she predicted that however the board proceeds, it will insist on a greater degree of disclosure about financial instruments than companies are required to provide now.
This story has been reprinted with permission from American Banker.
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Corrected November 15, 2010 at 4:53PM: yes