CUNA Regulatory Comment Call


June 11, 2001

Accounting Proposal to Measure All Financial Assets
and Liabilities at Fair Value

EXECUTIVE SUMMARY

The Financial Accounting Standards Board (FASB) has issued a special report that recommends full fair value-based reporting for virtually all financial assets and liabilities entitled Recommendations on Accounting for Financial Instruments and Similar Items (Draft Standard). The report was prepared by the Financial Instruments Joint Working Group of standard setters (JWG), an informal panel made up of representatives from FASB and FASB's counterparts in other countries formed to develop a world-wide framework for reporting financial instruments at fair value.

For the past several years, FASB has been working on its own project on fair value-based reporting and in December 1999 set forth its Preliminary Views (Reporting Financial Instruments and Certain Related Assets and Liabilities at Fair Value) on the issue. In February 2001, the Board reaffirmed its ultimate goal of requiring essentially all assets and liabilities to be measured at fair value in financial statements. The FASB Board also decided to establish an intermediate objective in the progress toward that goal. The intermediate objective is the issuance of a Statement that would describe more specifically how to determine fair value for financial instruments and improve the form and content of disclosures required by FASB Statement No. 107 (Disclosures about Fair Value of Financial Instruments). Although the Draft Standard is not a formal part of the due process in the FASB project, the Board expects comments it receives on many of the issues will be useful as its project progresses.

In the Draft Standard, the JWG explained its reasons for advocating the move to full fair value-based accounting: “Advances in financial risk management and information technology, globali[z]ation of capital markets, and accelerated use of sophisticated derivatives and other complex financial instruments have combined to change fundamentally the business and investment environment. It has become apparent that traditional accounting concepts for the recognition and cost-based measurement of financial instruments need to be rethought.” The JWG, believing that fair value is the most relevant measurement attribute for all financial instruments, has come to the conclusion that sufficiently reliable estimates of the fair value of financial instruments are obtainable for financial reporting purposes.

The Draft Standard proposes the following far-reaching changes to accounting for financial instruments and similar items:

Comments on the Draft Standard are due by June 30, 2001. Please submit your comments to CUNA by June 25, 2001. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Senior Regulatory Counsel Catherine Orr at corr@cuna.com; or mail them to Mary or Catherine c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. If you would like to submit your comments directly to FASB, the address is Financial Accounting Standards Board of the Financial Accounting Foundation, ATTN: RTA Director, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116; to submit comments to FASB electronically, send e-mail to director@fasb.org. If you submit comments directly to FASB, please also forward a copy of your comments to CUNA. You may contact CUNA if you would like a copy of the proposed Statement or you may access it on FASB's Web site at the following address: http://accounting.rutgers.edu/raw/fasb/new/index.html; click on Special Report, Financial Instruments and Similar Items; then click on the link under #2 Special Report; Financial Instruments and Similar Items that says “Download.”

DESCRIPTION OF THE PROPOSED STANDARD

Please click here for a more detailed description of the fair value proposal.

Scope and Definitions

Fair Value Measurement

Recognition and Derecognition

Financial Statement Presentation

Disclosures

The JWG believes that financial statement presentation and disclosure should be sufficient to enable evaluation of risk positions and performance in respect of each of an enterprise’s significant financial risks. To accomplish this objective, the Draft Standard would require:

Hedges

The Draft Standard does not permit special accounting treatment for financial instruments that are entered into as part of risk management activities. Financial instruments that are used for hedging purposes (for example, used as hedges of risks expected to arise from anticipated future transactions) are to be recognized and measure at fair value, with gains and losses recognized immediately in the income statement, just as for all other financial instruments.

Implementation and Transition

QUESTIONS REGARDING THE
PROPOSED STANDARD

Scope and Definitions

  1. The Draft standard would apply to all entities, including credit unions. Do you agree?

    Yes ________ No ________

    If not, please specify why you believe credit unions should be excluded from the scope and the basis on which you would distinguish credit unions from those entities that should apply the Draft Standard.









  2. The definition of a financial instrument would differ somewhat from the present IASC definition. Do you agree with the changes to the definition?

    Yes ________ No ________

    If not, what changes would you make, and why?









  3. The scope of the Draft Standard would include certain additional items, such as servicing assets and servicing liabilities. Do you agree that these additional items should be included in the scope?

    Yes ________ No ________

    If not, why not?









    Recognition and Derecognition

  4. The basic recognition principle is that an enterprise should recognize a financial asset or financial liability on its balance sheet when, and only when, it has contractual rights or contractual obligations under a financial instrument that result in an asset or liability. Do you agree?Scope and Definitions

    Yes ________ No ________

    If not, why not? How would you amend the principle?









    Fair Value Measurement

  5. Some credit unions question the JWG’s conclusion that fair values are, generally, reliably determinable, at reasonable cost, for all financial instruments except certain investments in private equity instruments. Those credit unions predict that volatility in financial statements, or wide swings in gains and losses, will result from a fair value-based system and that such volatility will not reflect reality. Do you believe that most financial instruments are capable of reliable fair valuation?

    Yes ________ No ________

    If you believe that other financial instruments are not capable of reliable fair valuation, what are they, what factors cause their fair values not to be reliably determinable, and how should these items be measured?









  6. The Draft Standard would require an enterprise to measure all financial instruments at fair value when recognized initially and to re-measure them at fair value at each subsequent measurement date (with the exception of certain private equity investments). Do you agree?

    Yes ________ No ________

    If not, what other approach would you suggest and why?









  7. The Draft Standard sets out principles for estimating fair value of financial instruments within a hierarchy. Do you agree with this hierarchy?

    Yes ________ No ________

    If not, how would you amend the proposal, and why?









  8. The Draft Standard provides that value that is not directly attributable to a financial instrument should not enter into the determination of the fair value of a financial instrument. This includes expected cash flows from future transactions with the customer that are expected to occur because of a relationship established by the existence of the financial instrument. Is this conclusion appropriate and operational, in particular as it applies to demand deposit and credit card relationships?

    Yes ________ No ________

    If not, why not?









  9. The Draft Standard would require the reported value of an entity’s financial liabilities to reflect the entity’s own creditworthiness and changes in it. Do you agree?

    Yes ________ No ________

    If not, why not?









  10. The Draft Standard would require enterprises to establish appropriate policies and procedures for estimating fair value of financial instruments. Do you agree with this proposal?

    Yes ________ No ________

    If not, how would you change it in a manner that provides reasonable assurance of reliable and consistent fair value estimates?









    Financial Statement Presentation

  11. The Draft Standard would require credit unions to recognize all changes in the fair value of financial instruments, after adjustment for receipts and payments, in the income statement in the reporting periods in which they arise. Do you agree?

    Yes ________ No ________

    If not, how should such gains and losses be treated, and why?









  12. Do you believe that gains and losses arising on fair value measurement of financial assets and liabilities should be separately presented in the income statement or notes thereto?

    Yes ________ No ________

    If yes, which gains and losses, and why do you believe that they should be shown separately? On what basis would such gains and losses be distinguished?









    Hedges

  13. The Draft Standard would not permit any special accounting for financial instruments entered into as part of risk management activities. Do you agree?

    Yes ________ No ________

    If not, why not?









    Disclosures

  14. The Draft Standard would require disclosure of a credit union’s significant financial risks and of the enterprise’s financial risk management objectives and policies. Do you agree that this information is necessary to provide the context for understanding and evaluating information about the enterprise’s actual financial risks and performance of its financial instruments.

    Yes ________ No ________

    If not, how would you change these disclosures?









    Implementation and Transition

  15. The Draft Standard recommends about two years is a suitable period of time between issuance of a final standard and the effective date to balance preparation time with the need for standards. Is that sufficient time to prepare for implementation?

    Yes ________ No ________

    If not, what would be an appropriate length of time?









  16. Some commentators suggest that a comprehensive fair value model for financial statements should be first introduced in supplemental financial statements, presented in parallel with financial statements prepared in accordance with existing practices. Only after a period of time would such financial statements replace financial statements prepared in accordance with existing practices. Do you believe that supplemental financial statements should be introduced before replacing financial statements prepared in accordance with existing practices?

    Why or why not?









  17. Other comments?









Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com