Changes in how banks and financial institutions value securities on the heels of new accounting rules likely wont bring about changes in their ratings, Standard & Poor's said Wednesday.
S&P said that, at this time, it does not see any ratings changes as a result of the Financial Accounting Standards Boards (FASB) new guidance on valuing securities in illiquid markets and other-than-temporary-impairment accounting standards.
As weve stated in our previous commentaries, we believe it is appropriate to allow greater emphasis on entity-specific information [ie, not market-based] in valuations when market observations are substantially lacking or are meaningfully influenced by temporary supply and demand disclosures, S&P said.
When it comes to the new other-than-temporary-impairment accounting standards, S&P said it is in favor of the increased transparency of credit losses they bring, but the credit rating agency noted that it could present reliability issues related to a companys ability to bifurcate losses into credit and noncredit components because the credit impairment amounts may be difficult to decipher in isolation.
Changes to the accounting process have fanned protests from a group of investors and former regulators. Last week, the Investors' Working Group (IWG), voiced concerns about the independence of FASB, the Norwalk, Conn., group that shapes accounting policy for U.S. companies.
Specifically, IWG raised concerns about political and special interest groups pressuring FASB and how it sets accounting standards. The pressures are unacceptable and very troubling, the IWG said in a statement.
IWG said it is concerned and dismayed by the lack of normal due process and accelerated timeline for commenting on FASBs proposals on other-than-temporary-impairment issues and determining whether a market is distressed."
Meanwhile, when it comes to fair value measurement for securities in illiquid markets, S&P said fair value measurement changes will result in increased analysis in evaluating significant adjustments companies make to observable market prices and related assemptions and judgements they apply.
"Potentially, more assets will be valued using level 3. This shift ... is a move toward greater use of internally derived measures," the rating agency said, noting that determination of whether a market is active or not will be based on "the highly subjective judgement of each company."