FASB Backs Off Mark-To-Market For Loans

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NORWALK, Conn. – The Financial Accounting Standards Board this afternoon took a step back on a controversial plan that would have required credit unions and banks to report all of their financial instruments–including loans--at their current market value.
The FASB move comes after an avalanche of comments by credit unions and banks who revile the notion because of the difficulty it would be ascertaining a true market value for their loans and the volatility it would add to their balance sheets. "Today's vote is really a strong result of due process at work," Neal McGarity, a FASB spokesman said in a statement.
The proposal would have been especially costly to community development credit unions who typically offer loans at a discount or to members with impaired credit, according to Michael Dougherty, president of Community Plus FCU, a $14 million CDCU in Rantoul, Ill. “It would have negatively affected our balance sheet and our capital ratios,’ Dougherty, who is a certified public accountant, told the Credit Union Journal this afternoon.
The seven-member FASB tentatively decided today to permit accounting for “plain vanilla” financial instruments–which will include loans-- at amortized cost, a reversal of a proposal from last year under which most types of financial instruments, including loans, would have to be reported at fair value.
Other assets under the tentative FASB proposal would still be reported at fair value, including assets held for sale or trading.
The “plain vanilla” assets that would be eligible for cost accounting would be “those instruments where the entity has a relationship with the borrower and the purpose is to be repaid with the collection of interest and fees,” said FASB chairman Leslie Seidman.

“We wouldn’t expect securities that are traded in an active market to qualify for this, where the purpose is to hold the asset for a period of time [and sell it].”NORWALK, Conn. – The Financial Accounting Standards Board this afternoon took a step back on a controversial plan that would have required credit unions and banks to report all of their financial instruments–including loans--at their current market value.

The FASB move comes after an avalanche of comments by credit unions and banks who revile the notion because of the difficulty it would be ascertaining a true market value for their loans and the volatility it would add to their balance sheets. "Today's vote is really a strong result of due process at work," Neal McGarity, a FASB spokesman said in a statement.

The proposal would have been especially costly to community development credit unions who typically offer loans at a discount or to members with impaired credit, according to Michael Dougherty, president of Community Plus FCU, a $14 million CDCU in Rantoul, Ill. “It would have negatively affected our balance sheet and our capital ratios,’ Dougherty, who is a certified public accountant, told the Credit Union Journal this afternoon.

The seven-member FASB tentatively decided today to permit accounting for “plain vanilla” financial instruments–which will include loans-- at amortized cost, a reversal of a proposal from last year under which most types of financial instruments, including loans, would have to be reported at fair value.

Other assets under the tentative FASB proposal would still be reported at fair value, including assets held for sale or trading.

The “plain vanilla” assets that would be eligible for cost accounting would be “those instruments where the entity has a relationship with the borrower and the purpose is to be repaid with the collection of interest and fees,” said FASB chairman Leslie Seidman.

“We wouldn’t expect securities that are traded in an active market to qualify for this, where the purpose is to hold the asset for a period of time (and sell it)," she said.

 

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