WASHINGTON-Corporate credit unions, saddled with billions of dollars in distressed mortgage securities, have joined the banks in a call for reform of accounting rules that require them to regularly change the value of their holdings based on market conditions-the practice known as fair value, or mark-to-market, accounting.
Corporate executives called on the Financial Accounting Standards Board, which sets the rules for generally accepted accounting principles-or GAAP-to amend the rules to acknowledge that in unprecedented market conditions like those of the past three months there is virtually no way to determine an accurate market value for certain assets.
For example, the recent failure of Lehman Brothers Holdings and other major issuers of so-called private label mortgage-backed securities has eliminated the market for those securities, rendering the market value for them virtually worthless, even while many of those securities continue to pay principle and interest to the corporates and other holders.
Several corporates called on the FASB, as it was moving to clarify its mark-to-market rules, for more leeway in reporting the market value of their holdings by, among other things, allowing them to figure into their calculations "severe liquidity risk premiums" of the recent seizure in financial markets.
"For available-for-sale securities where management has demonstrated the intent and ability to hold, the [clarification] should allow current severe liquidity risk premiums to be adjusted in the determination of fair value to levels observed during periods of normal market activity," said Thomas Graham, president of SunCorp Corporate CU, in a comment letter submitted to the FASB. SunCorp reported $61 million in mark-to-market losses on its securities at mid-year.
"The recognition of distressed values in financial statements that will never be realized by an entity does not accurately depict the true economic conditions of an entity and, as we have already seen, results in misleading information being reported to its investors, creditors and customers," said Robert Siravo, president of WesCorp FCU, in a letter to the FASB. WesCorp reported more than $1.6 billion in mark-to-market losses on its securities at Aug. 31.
"The recognition of distressed values in financial statements that are based upon fire-sale prices distorts the economic reality of their financial condition in that such prices will not be realized by institutions that buy and hold securities until recovery or maturity," wrote Melissa Wardell, chief financial officer for Southwest Corporate FCU, which reported mark-to-market losses of almost $1 billion at Aug. 31.
Francis Lee, president of U.S. Central FCU, which reported $3.1 billion of mark-to-market losses at Aug. 31, urged the FASB to change the definition of fair value for held-to-maturity securities to "approximate realizable value." "This is of great importance when determining the amount of potential other-than-temporary impairment charges," Lee told The FASB.
Still, the FASB turned away pleas by the corporates and the banks to amend its rules and instead issued a clarification that reemphasizes that in times when there is no credible market for an asset an entity may use other criteria to determine the market value.
The American Bankers Association was not satisfied with the FASB's action and turned to the Securities and Exchange Commission in a request for additional leeway on mark-to-market rules. While credit unions are not bound by SEC rules, NCUA often follows the SEC in setting accounting standards for credit unions.
NCUA examiners are already working with corporate credit unions to determine how the clarification of the mark-to-market rules could ease the strain on corporate balance sheets of billions of dollars in troubled assets, just as the corporates are preparing their financial statements for the recently completed third quarter, according to several sources.
The corporates hope that they will not have to write down the value of some of their distressed holdings for which there is no current market. They hope instead to be able to hold some or most of the distressed securities to maturity and thus not have to report any losses, or at least negligible losses, on their balance sheets.
The corporates bid comes as the plunging market value for mortgage securities has caused growing unrealized losses on their books, as much as $10 billion for the corporate network.
After an incredibly short comment period-just four days-the FASB issued a clarification of its Financial Accounting Statement 157 that reemphasizes its prior position that in the absence of a credible market for an asset an entity may substitute its own judgment, including using expected cash flows and risk-adjusted discount rates; and how available data from an inactive market should be counted.
Brad Miller, Washington lobbyist for the Association of Corporate CUs, said the FASB clarification fell short of what the corporates had hoped for, but should still help them in valuing their assets. "It provides a little more guidance," Miller said. "It clarifies some of the different ways how assets can be valued."
"I think what it showed is there's more than one way to value these assets," he said.
