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
The Financial Accounting Standards Board (FASB) has proposed this FASB Staff Position (FSP) to amend existing other-than-temporary impairment (OTTI) guidance. Specifically, it would amend Financial Accounting Standards (FAS) No. 115-a, FAS 124-a, and EITF 99-20-b.
The changes would seek to make current guidance more operational and to improve the presentation of OTTI in financial statements.
This proposed FSP applies to OTTI of both debt and equity securities. It would be effective for interim and annual reporting periods ending after March 15, 2009, and would be applied prospectively.
Comments are due to FASB by April 1, 2009; please submit your comments to CUNA by March 24, 2009.
Please feel free to e-mail your responses to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org and to Regulatory Research Counsel Luke Martone at email@example.com. You may also contact us at 800-356-9655, ext. 6743, if you have questions. Click here to access the proposed FSP.
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:
- At the measurement date, the security's fair value is below its amortized cost; and
- The reporting entity "intends to sell" or it is "more likely than not that it will sell" the security before recovery of its cost basis.
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:
- At the measurement date, the security's fair value is below its amortized cost;
- It is "more likely than not that the reporting entity will not sell" before recovery of its cost basis; and
- It is probable that the entity "will be unable to collect all amounts due" according to the contractual terms of the security.
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.
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.
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.
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.
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
- Will the proposed separation of impairment loss result in its intended benefit to reporting entities? Do you foresee any unintended consequences of separation?
- Should this proposed FSP apply to both debt and equity securities?
- Does the recently proposed FSP on fair value eliminate the need for this proposed FSP?
- Any other questions or concerns?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Luke Martone Senior Regulatory Counsel (202) 508-6743 email@example.com