NORWALK, Conn. – The Financial Accounting Standards Board is expected to offer some relief today to corporate credit unions and banks with large holdings of impaired securities by changing some of the rules for fair value, also known as mark-to-market accounting.
The proposal comes as the corporates are struggling with growing unrealized losses of as much as $18 billion on impaired securities–the difference between the price the securities were purchase at and current market values. The FASB ruling will go a long way to determining how much of those unrealized losses the corporates will have to realize on their books in the coming weeks and months.
"The point is, the FASB is taking small steps towards rectifying some of the inequities of fair value accounting," Brad Miller, Washington lobbyist for the Association of Corporate CUs, told The Credit Union Journal.
A security held by Corporate One FCU illustrates the corporates’ dilemma. The asset-backed security issued by Sallie Mae is backed by federally guaranteed student loans and has zero claims rejected. Even though the bond is paying principal and interest and the corporate expects to receive par for the bond Corporate One was forced to write-down this AAA-rated bond to fair value on its books because of the unprecedented illiquidity in the market.
In another example, U.S. Central FCU reported it was forced to write down the value of a $41 million AAA rated mortgage-backed security by $1.275 million last year because of an estimated cash flow shortfall of just $22,976, even while the MBS continues to pay timely principal and interest this year and the security is still rated AAA by all three Wall Street agencies.
The FASB, which sets the rules for generally accepted accounting principles, or GAAP, is expected to amend its previous guidance on determining "other-than-temporary impaired" in order to allow entities to use their own judgment on whether a security is impaired, rather than the current fair market value. That judgement could be based on whether the security continues to pay principle and interest on time and whether the entity has the intent and ability to hold it to maturity, rather than the impaired value in today’s distressed credit markets.
The changes, to be voted by the FASB this morning, would allow the corporates and banks to write-down securities determined to be other-than-temporarily impaired to "net realizable value," rather than the current market value. If approved, the change would be effective for all financial statements for the periods before Dec. 15, 2008, meaning fourth quarter and year-end statements.
Federal regulators, including NCUA, have endorsed the FASB proposal, according to comment letters submitted on the initiative, known as proposed changes to the Emerging Issues Task Force statement 99-20.
