Washington-- Banking industry officials hailed changes to a Financial Accounting Standards Board rule that they have long complained unfairly distorts banks' quarterly earnings.
The move eliminates so-called debt-valuation or credit-valuation adjustments—a controversial aspect of the multi-faceted fights over fair-value accounting. The adjustments required companies to value bonds and certain other obligations based on their current market price rather than their original cost.
The changes will benefit the industry, which has sought them for years, said Donna Fisher, a senior vice president of tax and accounting at the American Bankers Association.
“It is [part of] the tortured debate about mark-to-market accounting,” said Fisher, who noted that the feedback the FASB had gathered from investors was "extremely important” in influencing its decision.
The valuation adjustments allowed companies to post outsized gains on certain structured notes and derivatives immediately after the financial meltdown and forced them to book big losses on debt issuances years later as credit quality began to improve. The matter is complex and on some level counter-intuitive, but the credit recovery hurt banks in this instance because, as their creditworthiness rose, the value of their IOUs to investors rose in value, and thus their liabilities increased, too.
Under the changes announced Tuesday, banks will be allowed to exclude the valuation adjustment from net income on their quarterly financial statements. The adjustments will be recorded separately as “other comprehensive income,” according to a press release from the FASB.
“The standard is intended to provide users of financial statements with more useful information,” FASB Chairman Russell Golden said in the release. “It improves the accounting model to better meet the requirements of today’s complex economic environment.”
Equity portfolios will have to be marked at current value, Fisher said, noting that provision could affect certain savings institutions, particularly in the Northeast.
The changes take effect for fiscal years and quarters starting after Dec. 15, 2017, for public companies. They apply to privately held companies, non-profits and other entities in fiscal years beginning after Dec. 15, 2018, and for quarters or other interim periods starting after Dec. 15, 2019.
Possible revisions have been in the works for years. The FASB began working on the changes in 2012 amid widespread industry criticism.
For credit unions, the new standard will become effective for fiscal years beginning after Dec. 15, 2018.
The National Association of Federal Credit Unions said in a statement that the new accounting standard creates a “framework for classifying financial instruments and linking their liabilities to whether an entity is expected to pay the contractual cash flow associated with the liability or to settle it as its fair value.”
In a May 2013 comment letter to FASB, NAFCU said this standard would be “highly burdensome” for credit unions to implement. In that letter NAFCU also wrote that the disclosures “would bring little to no utility to credit union members” since the entity primarily interested in credit unions’ financial statements is the NCUA.
“As highly regulated entities and member-owned institutions, it is crucial that credit unions’ assets are reflected in the most accurate and appropriate manner,” NAFCU noted.
NAFCU added that while it “generally supports” the FASB’s goal of reducing the complexity of accounting for financial instruments, while affording financial statement users with more practical and transparent information about an entity’s financial assets and liabilities, NAFCU does not believe this framework is well-suited, or especially beneficial, to users of credit union financial statements—that is, the NCUA and credit unions’ members.
“Credit unions are motivated by meeting their members’ needs and providing quality service, not by profit,” the NAFCU letter further pointed out. “Thus, every dollar they use to comply with regulations and accounting standards is a dollar they cannot use for the greater good of their members. Standards geared towards publicly held entities are often inapplicable or extremely difficult and costly to apply to credit unions.”
Carrie Hunt, executive vice president of government affairs and general counsel for NAFCU, said that since credit unions are mandated to follow GAAP (Generally Accepted Accounting Principles) and since FASB is an official board tasked with seeking to improve accounting standards – most measures FASB enacts will likely have some impact on credit unions, however this change is not anticipated to be as impactful as some.
--Kristin Broughton contributed to this article.
