GAAP and IFRS

FASB Wipes Clean a “Tainted” Provision

The Financial Accounting Standards Board's decision to reaffirm existing guidelines for writing off impaired debt securities comes as a relief to t...
Ed ZwirnJuly 5, 2005

The Financial Accounting Standards Board’s discussion on revising certain aspects of FAS 115, the standard that governs much of the treatment of debt securities for profit-and-loss and balance-sheet purposes, set off a firestorm of concern in banking circles.

Much of the controversy has centered on Emerging Issues Task Force Issue 03-1, which provides guidance on the meaning of the phrase “other-than-temporary impairment” and its application to several types of debt securities. Last year, when FASB issued EITF 03-1-a — which would delay the effective date of certain provisions of 03-1 — the board received more than 250 comment letters, “the vast majority” of which requested that 03-1 be rescinded in its entirety, according to the board.

The most troublesome aspects of 03-1, according to Donna Fisher, director of tax and accounting at the American Bankers Association, are its “tainting” provisions. These provisions, which could require the write-off of one security in a portfolio when certain other securities had been sold before their time, could apply even to risk-free securities such as Treasury debt, observes Fisher. Treasury securities are “underwater” only if interest rates shift to the investor’s detriment, but by the logic of some proposals floating around FASB, she notes, holders of these securities — which are classified as “available for sale” — would have had to write them off against profit-and-loss if they had been underwater for a given period of time or if similar securities in the bank’s portfolio had been sold before their maturity.

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To the relief of Fisher and many of her colleagues, the board steered clear of the controversy at last Wednesday’s meeting when it decided to essentially scrap 03-1 and replace it with a staff position affirming the impairment provisions of FAS 115.

“We are very pleased with the decision,” says Fisher. Banks had been “afraid,” she adds, of the idea that an investor would be required to “mark other securities to market” if they had been sold off despite previously being designated as “held to maturity.”

In other business last week:

• FASB and the International Accounting Standards Board proposed a standard — one of the most ambitious under the FASB/IASB convergence agenda — that would replace the existing requirements of FASB Statement No. 141, Business Combinations, and IFRS 3. FASB and IASB did, however, make their proposal in separate exposure drafts; the comment period ends October 28.

The proposals retain the fundamental requirement of IFRS 3 and Statement 141 that all business combinations be accounted for using a single method in which one party is always identified as acquiring the other. Principal changes: The acquired company must be measured at fair value; goodwill attributable to any noncontrolling interests (not just the portion attributable to the acquirer) must be recognized; and fewer exceptions to the principle of measuring, at fair value, assets acquired and liabilities assumed.

• A proposed staff position deferred a provision of FAS 123R, the board’s revised rule on Share-Based Payment, that would have complicated the treatment of options remaining unexercised when an employee left the company, according to many finance executives.

The provision specifies that when an employee leaves a company while still holding unexercised options, 123R applies only for the first 90 days. Since many workers have the right to exercise options for as long as three to five years after they leave their job, finance professionals had faced the prospect of applying an assortment of complex tests to determine which standard to apply from day 91 through expiration.

The comment period on the proposed staff position, FAS 123R-a, ends July 29. Companies should apply its guidance when they must expense options under FAS 123R, which for most public companies begins with their first fiscal year starting after June 15.

Looking ahead to this Wednesday:

• The board will discuss the scope of its derivative disclosures project and whether the disclosure guidance should be limited to derivatives accounted for under FAS 133, Accounting for Derivative Instruments and Hedging Activities, or expanded to include all financial instruments.

• The board will also discuss whether to approve issuing a staff position on FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. The staff position would clarify the accounting guidance in paragraphs 40(b) and 40(c), which concerns the notional amount of passive derivative instruments held by qualifying special-purpose entities.