The war isn't over, but bankers opposed to a wholesale adoption of fair-value measurement won a pivotal battle Tuesday when the Financial Accounting Standards Board (FASB) carved out an exception for plain-vanilla loans held to maturity.
Basic loan assets originated or purchased for long-term cash-flow collection should continue to be eligible for cost-based accounting, the board ruled in an early round of redeliberations over a plan to expand the use of fair-value accounting. The original proposal, made in May, would have made fair value the de facto standard for nearly all financial instruments.
Eligibility for cost accounting, a method that relies on gauges of impairment rather than actual or estimated market prices, would depend on how the asset was obtained and how the owner planned to use it. It would not be extended to assets serving a trading or treasury management function.
"It's really [for] those assets where the entity has a relationship with the borrower … and then [is to] be repaid by collection of the cash flows and fees," FASB Chairman Leslie Seidman said during a State of the Union-style Webcast held just a few hours after the board met. The meeting to revisit the fair-value proposal initially was scheduled for December but was postponed because of a snowstorm.
The board will continue to reconsider different aspects of its original proposal, which drew more than 2,800 letters during a three-month public comment period over the summer. A vast majority of the letters, from investors, accounting experts and banks both large and small, were critical of the proposal.
Seidman said it was too early to say whether the proposal would be reissued in its revised form for public comment before a final ruling is made later this year. But the American Bankers Association, which lobbied strongly against the original proposal, wasted no time in weighing in on the latest developments.
"Today's shift recognizes investor concerns that a company's business model should be a key factor in measuring financial instruments," ABA President and Chief Executive Frank Keating said in a statement posted on the group's Web site.
"While we recognize and applaud this direction, there is still more work to be done," Keating said. "We are concerned that FASB may expand mark-to-market to many debt securities that are not traded, but are held to maturity. This would introduce unnecessary volatility to bank capital levels and would fail to reflect how banks are managed."
As it stands, the FASB's proposal would not allow securities that are traded in an active market to qualify for cost-based accounting. That represents a key difference between the FASB's thinking and a ruling from the group's international counterparts.
The International Accounting Standards Board already has agreed that certain securities held for interest or total return purposes may be valued at amortized cost. But in the United States, "we had many investors … express a preference for fair value in those instances," Seidman said.
The disparity is notable because the two boards are trying to smooth out their differences, with the goal of eventually converging accounting standards for financial statement preparers around the globe.
The FASB's original fair-value proposal broke sharply with the IASB, which preserved cost accounting as an option for basic assets when the holder's objective is to collect the contractual cash flows.
Former FASB Chairman Robert Herz had been in favor of making fair value the de facto standard for nearly all financial assets, including basic loans as well as deposits.
But in a striking turn of events, Herz retired on Sept. 30 and was replaced with Seidman, a board member and former JPMorgan & Co. accounting policy executive who was in the minority on several of the 3-to-2 board decisions on which the proposal was based.
A concurrent decision to expand the board from five members to seven was perceived by some observers as further evidence that the proposal, in its original form, was losing momentum internally.