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The staff re-interprets how to account for written commitments in light of its new fair-value standards.
Sarah Johnson, CFO.com | US
November 6, 2007
The Securities and Exchange Commission staff has modified its position on how companies should account for written loan agreements when using the fair-value accounting method. The newly issued opinion follows the recent issuance of new fair-value guidelines that many companies could start using this month.
Issued in February by the Financial Accounting Standards Board, FAS 159 gives companies the irrevocable option of accounting for certain financial assets and liabilities using the fair-value method rather than traditional methodologies like historical cost. A portion of FASB's guidance in both FAS 159 and FAS 156, Accounting for Servicing of Financial Assets, negates an understanding the SEC came up with more than three years ago for companies that issue loans.
On Monday, the SEC staff released Staff Accounting Bulletin No. 109 to modify its SAB 105, which explained how to apply generally accepted accounting principles to loan commitments. The new guidance changes when lenders can recognize a loan's servicing assets. Under the previously issued bulletin, lenders were told that when recognizing a loan agreement, they could not consider future servicing fees and other rights in calculating future cash flows from a loan they planned to sell.
However, the SEC staff says now that companies can and should include their expected net future cash flows for servicing loans when measuring written loan commitments accounted for at fair value. "The new guidance reconciles a difference between the FASB fair-value guidance and the SEC guidance on measuring fair values of loan commitments," explains Alison Utermohlen, senior director of government affairs for the Mortgage Bankers Association.
Under FAS 133, FASB's accounting standard for derivatives, a funded loan that will be sold is accounted for as a derivative instrument and recorded at fair value. In addition, under FAS 159, a bank can record a written loan commitment at fair value if it doesn't plan to sell the loan.
The latest interpretative guidance from the SEC's chief accountant and corporation finance divisions uses the example of a bank that will create a mortgage loan it does intend to later offload. When measuring the fair value of the loan agreement, the bank should factor in its expected net future cash flows related to its servicing rights of the loan, such as servicing fees or late charges.
In another matter, the SEC staff stuck to its previously issued bulletin for intangible assets that are developed internally during a loan contract. Those assets, such as customer relationship intangible assets, should not be incorporated in the fair value of a derivative loan commitment. "This SAB retains that staff view and broadens its application to all written commitments that are accounted for at fair value through earnings," the SEC wrote.