FASB Giving Lenders a Break on Impairment

Washington-The Financial Accounting Standards Board approved changes to its impairment guidance last week that should reduce the amount of charges banks and other holders of mortgage-backed securities have to report for the fourth quarter.

The accounting body has been under pressure from financial institutions, trade groups, and even some elected officials to adjust its "other-than-temporary impairment" (OTTI) guidance.

This pressure led FASB to issue the proposed changes to its OTTI guidance on Dec. 19 and finalize it at a board meeting last Wednesday by a 3-2 vote.

The new guidance allows management to make a "reasonable judgment" of future cash flows of debt securities in determining impairment. Previous guidance required consideration of what "market participants" would use in determining the current fair value of MBS.

At Wednesday's meeting, the board amended the proposed guidance to stress that MBS holders are required to assess collections of future cash flows even when the securities are performing and borrowers are making timely payments.

In making that assessment, MBS investors must consider all available information reflecting past events and current conditions in developing estimates of future cash flows.

"I don't think it represents amnesty on OTTI in the fourth quarter," said FASB member Leslie Seidman. "It still requires an assessment of the collectibility of the cash flows." Board members also stressed that the new guidance is not retroactive to the third quarter or previous periods. One dissenting board member expressed concerns the changes will allow financial institutions to defer losses on commercial MBS, which could lead to bigger problems down the road and a loss of investor confidence.

In related news, the Securities and Exchange has completed a congressionally mandated study on fair value or market-to-market accounting and its impact on the current financial crisis.

The SEC said fair value accounting needs to be improved, particularly when it comes to impairment issues. However, the SEC concluded that fair value accounting did not play a "meaningful role" in the bank failures of 2008.

The agency noted that fair value accounting should not be suspended as requested by the American Bankers Association, Independent Community Bankers of America and other banking groups. The SEC sent its accounting study to Congress on New Year's Eve, indicating it supported FASB's OTTI guidance.

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