Last week the Financial Accounting Standards Board decided to expand the scope of the proposed implementation of sections of the Emerging Issues Task Force 03-1 (The Meaning of Other-Than Temporary Impairment and its Application to Certain Investments), officially delaying implementation. The scope now includes the securities under paragraphs 10 to 20 of the guidance, covering super-premium prepayable or callable securities as well as equity securities such as cost-method investments.
Earlier this month, The Board delayed the implementation of the guidance that relates to the impairment for price declines on debt securities due solely to rising interest rates. Specifically, FASB proposed to postpone the implementation of the effective date for paragraph 16 of EITF 03-1 as it applies to available-for-sale (AFS) debt securities that are underwater solely because of an increase in interest rates.
In discussions regarding the postponement of paragraph 16, talk centered around what would constitute a minimal impairment. However, it remained unclear whether securities under paragraph 10 - the implementation of which is now delayed - could be covered under the exception for securities merely suffering from "minimal impairment." Under the proposed rule, management would not be required to make any claims regarding a security that only suffers from this type of impairment. As previously reported, the FASB has asked for comments to determine whether The Board should specify a numerical threshold like a 5% decline versus amortized cost (see ASR 9/27/04).
During the Thursday meeting, it was also decided that FASB would continue deliberating whether certain impairments could be classified as "minor" and the circumstances under which the sale of an "available-for-sale" security at a loss will taint the entire portfolio. This particular issue has caused some apprehension among market participants.
Last Thursday evening the Board posted on its Web site FASB Staff Position EITF 03-1 implementing the aforementioned delay. The posting included caution that all existing authoritative literature on the need to recognize other-than-temporary impairments in securities that are held in hold-to-maturity and AFS portfolios would remain applicable during the previously announced delay period. Additionally, disclosure guidance in paragraphs 21 and 22 EITF 03-1 remains effective.
In a related development, Countrywide Securities released a report last Thursday saying that EITF 03-1 may have some interesting effects on investment decisions, which would depend on the form in which the proposal is finally adopted. The firm said that while financial institutions are typically reluctant to take losses, analysts could predict certain circumstances where investors may have more of a propensity to sell securities at a small loss. For instance, if a 5% threshold were adopted and an extended bear market in bonds occurred, an institution might decide to sell some securities more quickly while losses remained small. This is to avoid the possibility of having to re-evaluate other securities held as AFS.
Countrywide warned, "We strongly recommend that investors consult their accountants before undertaking any investment strategy involving the issue."
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