CUNA Regulatory Comment Call

March 19, 2009

Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b: Recognition and Presentation of Other-Than-Temporary Impairments

EXECUTIVE SUMMARY

Please feel free to e-mail your responses to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.coop and to Regulatory Research Counsel Luke Martone at lmartone@cuna.coop. You may also contact us at 800-356-9655, ext. 6743, if you have questions. Click here to access the proposed FSP.

BACKGROUND

If the fair value of a security is less than its cost basis at the measurement date, U.S. generally accepted accounting principles (GAAP) require the reporting entity to then determine whether the impairment is other than temporary. Such a determination requires several steps, and currently includes an assessment of whether the reporting entity has the "intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value." OTTI securities must be recognized entirely in earnings.

The Emergency Economic Stabilization Act of 2008 tasked the Securities and Exchange Commission (SEC) with conducting a study on mark-to-market accounting standards. Upon completion, the SEC recommended FASB make several changes to improve the accounting standard, one of which is addressed in this FSP.

BRIEF DESCRIPTION OF THE PROPOSED FSP

Generally, this proposed FSP would separate out impairment of debt and equity securities due to credit loss from loss due to other factors for financial presentation purposes.

Recognition and Measurement

OTTI would exist for a debt or equity security if:

If OTTI exists, the entire amount of impairment would be recognized in earnings. The security's fair value would become its new cost basis and would not be adjusted for subsequent recovery in fair value.

Additionally, OTTI would exist for a debt security if:

If OTTI exists, the amount of impairment related to the credit losses would be recognized in earnings. The remaining amount of impairment related to other factors would be recognized in other comprehensive income (OCI). The security's previous cost basis less the amount of impairment recognized in earnings would become its new cost basis and would not be adjusted for subsequent recovery in fair value.

Subsequent Measurement

In periods following the recognition of OTTI for debt securities, a reporting entity would account for the OTTI debt security as if it had been purchased on the measurement date of the OTTI at a cost equal to the previous basis less the impairment recognized in earnings. Unless a sale is imminent, the reduced premium recorded for the debt security-based on the new cost basis- would be amortized over its remaining life prospectively based on the amount and timing of future estimated cash flows.

Impairment recognized in OCI for held-to-maturity securities would be amortized (through OCI) over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows by offsetting the recorded value of the asset unless there is a subsequent OTTI charge recognized in earnings.

Presentation

For periods in which a reporting entity determines that a security's decline in fair value below its amortized cost basis is other than temporary, that entity would present the total impairment in the statement of earnings with an offset for any impairment recognized in OCI.

Disclosures

For periods in which a reporting entity determines that a security's decline in fair value below the amortized cost basis is other than temporary and the impairment is separated between credit losses and losses related to other factors, that entity would disclose the methodology and key inputs used to measure the portion of total impairment due to credit losses.

Alternative View

Several members of the FASB Board oppose the changes presented in this FSP. The dissenting members believe that the recently proposed FSP related to fair value would greatly reduce or eliminate the need for this FSP. Additionally, "[t]hey believe that risks are high that a unilateral change to the recognition and presentation of other-than-temporary impairments could create the opportunity for an 'accounting arbitrage' with pressure for FASB and IASB standards to converge to the standard perceived most lenient."

Lastly, these members are concerned that if adopted, this FSP may reduce the amount of impairment loss recognized in financial statements and could lead to even lower investor confidence.

QUESTIONS TO CONSIDER REGARDING THE PROPOSED FSP

  1. Will the proposed separation of impairment loss result in its intended benefit to reporting entities? Do you foresee any unintended consequences of separation?
















  2. Should this proposed FSP apply to both debt and equity securities?
















  3. Does the recently proposed FSP on fair value eliminate the need for this proposed FSP?
















  4. Any other questions or concerns?
















Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Luke Martone • Senior Regulatory Counsel • (202) 508-6743 • lmartone@cuna.com