American Bankers Association Voices Concern On FASB-IASB Financial Instruments Project

Aug. 13, 2009

FEI Summary

On Aug. 12, 2009 the American Bankers Association issued a white paper yesterday, entitled: The Current Pace and Direction of Accounting Standard Setting. The white paper is attached to an ABA Aug. 12 comment letter filed with the Financial Accounting Standards Board and the International Accounting Standards Board on their joint project on financial instruments. (The project is sometimes referred to as FASB's "FIRM" project, for Financial Instruments - Recognition and Measurement.) 

ABA's August 12 letter and white paper follow the release of another ABA white paper, entitled Loans and Debt Securities - Principles to Follow in Developing a New Accounting Model, attached to an ABA Aug. 4 comment letter to FASB and the IASB on the financial instruments project. 

In their Aug. 4 letter, ABA said they are "deeply concerned about the direction being taken on the FASB and IASB 'joint project' relating to recognition and measurement of financial instruments." ... Because these two types of assets [loans and debt securities] represent a majority of the U.S. banking industry's total assets, your actions are expected to have a major impact on the business of banking."

Points noted in ABA's Aug. 4 letter include:

• [W]e believe our perspective reflects a 'silent majority' among users of financial statements.
• Because these two types of assets [loans and debt securities] represent a majority of the U.S. banking industry's total assets, your actions are expected to have a major impact on the business of banking.
• During the current economic crisis, preparers of financial statements, external auditors, regulators and others have agreed that 'mark to market' accounting (MTM) estimates have lacked a sufficient level of reliability. With this experience, it is surprising that the IASB and FASB would both establish new accounting models that expand the use and prominence of MTM rather than either reduce it or at least maintain the current level.
• We understand that certain investors and investment bankers who provide input to the Boards advocate MTM; however, accounting rules should address a wide variety of users and provide information that is relevant to generating cash flows and determining the prospect for generating future cash flows. Therefore, bankers have consistently advocated that, in contrast to a "one-size fits all" model that is emphasized by pro-cyclical MTM, accounting for loans and debt securities held at banking institutions should reflect the applicable business models used by bankers.

In their follow-up letter to FASB and the IASB on August 12, ABA states they are "concerned about the process being taken on the FASB and IASB projects relating to financial instruments," adding, "[t]he changes that the FASB and IASB are considering represent the most significant accounting changes we have ever experienced. We encourage the FASB and IASB to make such changes only with utmost caution and the appropriate level of due process to correspond with the magnitude of the changes."

Points raised in ABA's Aug. 12 letter include:

• Although we agree that a certain amount of change is urgently needed, the FASB and IASB direction may cause significant disruption, with both preparers and users of financial statements.
• The rapid paces at which both organizations are working, as well as the paths being taken, are causing some to question whether there is due process in evaluating these important issues.
• Some bankers also question whether such efforts are driven by a search for simplicity, transparency, and accuracy or by an appetite to expand fair value accounting, no matter the implications.
• The cost of accounting compliance puts continued participation in certain market activities at risk for some smaller institutions.
• Another concern is the current divergence between the FASB and IASB proposed models and time frames for completion. The IASB plans to finalize its accounting standard in 2009, and the FASB's completion date will be subsequent to that date. In such case, the FASB will have only one of two choices: (1) to follow the IASB model – which will not provide U.S. companies with appropriate due process for providing input, or (2) a lack of international convergence – which should be avoided. Also related to this is that the IASB appears to be solving the accounting puzzle on a piecemeal basis, which may result in pre-determining the outcome for subsequent parts of the puzzle that may not fit.

In the white paper attached to their Aug. 12 letter, ABA states:

• While FASB generally adheres to an eight step process [i..e, eight step due process, described in App. C of ABA's white paper], the IASB’s intention to issue its final rule by the end of 2009 puts into question whether a thoughtful deliberation is possible by the boards and by users and preparers whose input is critical.
• While FASB is not required to accept any decisions made by IASB, the Securities and Exchange Commission, FASB, and IASB have been working toward convergence for several years. This convergence effort by the two boards (and the allusion to such convergence in the G-20 report) ensures that IASB actions will be given extra credence during the FASB’s deliberations. This is why such action by the IASB is of great concern to U.S. companies.
• Some have noted that demands from the SEC, which may have received pressure from members of Congress, has resulted in FASB’s quick issuance of its securitization and consolidation rules – even though it may result in a lack of convergence with international standards and may throw a monkey wrench into recovery.
• Similarly, some have indicated that the G-20 recommendation has resulted in pressure on the IASB to finalize its rules on loan and debt security accounting before year-end 2009 – even though it may result in a lack of convergence with U.S. GAAP.
• However, bankers question whether the massive changes being contemplated by the IASB and FASB were truly contemplated by those requesting quick action.
• Given the possible consequences upon all financial services industries, bankers believe a more deliberate discussion among these groups, financial statement users, regulators and preparers be conducted to identify what degree of change is needed.
• For instance, confusion over the mere terms "transparency" and "fair value" can have unintentional adverse repercussions and result in missing a more reasonable repair of current standards.

FASB Response

In response to the ABA letters/white papers, FASB Spokesman Neal McGarity stated:

Changes To Securitization, Consolidation (of SPE/VIE) Rules
ABA also noted in their Aug. 12 white paper that they had previously requested regulatory guidance relating to capital requirements in light of changes to FASB's rules on securitizations and consolidation (i.e. relating to changes in accounting for special purpose entities or variable interest entities.) ABA states:

• These new rules [FAS 166, FAS 167], which are expected to significantly increase regulatory capital requirements for entities that securitize assets, puts into question whether such coordination [with regulators] was performed.
• While some are still digesting the rules and continue to question the logic used in the rules, as of this date, banks have not been notified as to how to react to these new requirements from a regulatory capital perspective.
• The restoration of securitized credit markets may be delayed further because of these new rules and the lack of information about the regulatory impact.

NOTE: on the subject of the changes to securitization and consoliation (of SPE, VIE) accounting under FAS 166, FAS 167 (amending FAS 140 and FIN 46R) issued in June, FASB has a webcast slated for Aug. 24 to further describe these changes. Registration is required to listen to the live or archived webcast.

Prepared Aug. 13, 2009 by Edith Orenstein, director, Accounting Policy Analysis & Communications, Financial Executives International. This summary does not represent FEI opinion unless specifically noted above.