NORWALK, Conn.-The Financial Accoun-ting Standards Board voted last week to change guidance for accounting for impaired securities so that preparers of financial statements may rely more on expected cash flows, rather than the current distressed market values, when assessing the fair market value for their investments.
The move will help corporate credit unions, banks and other large holders of financial instruments that are struggling with whether to mark some of their investments to "other-than-temporarily impaired," and thus have to take a charge for impaired securities.
The new guidance from FASB emphasizes that financial entities should consider all available information - reflecting past events and current conditions - when developing the estimate of future cash flows for determining whether to record an other-than-temporary impairment.
All available information would include, but not be limited to, the remaining payment terms of the instrument and economic factors that are relevant to the collectibility of the instrument, such as current prepayment speeds, the current financial condition of the issuer, and the value of any underlying collateral.
The action comes as corporates are working to decide when to realize some of an estimated $18 billion of unrealized losses, representing the loss of market value, on their books.
At least two corporates, Southwest Corporate Federal Credit Union and Corporate One Federal Credit Union, realized multi-million losses on their books in November, representing other-than-temporary impairment.
The action by the accounting rulemaker board will give some of the corporates an immediate boost because it will be effective for both the fourth quarter of 2008 and the fiscal year.
The five-member panel approved the changes to the Emerging Issues Task Force statement 99-20 on a narrow, three-to-two vote.
Leslie Siedman, a board member who voted in favor of the change, said one important test for other-than-temporary impairment should be "is it probable you're going to collect all of the cash flows."
But board member Marc Siegel, who voted against the change, said the new guidance "will simply allow the deferral of losses for this period for many, many financial institutions."
