NORWALK, Conn. – The Financial Accounting Standards Board voted several changes to its mark-to-market rules this morning to ease the strain on banks, credit unions and other financial institutions–but in a major blow rejected requests to allow the entities to apply the changes retroactively to their 2008 financials.
The five-member board, which sets the rules for gnerally accepted accounting principles, or GAAP, agreed the changes will be effective going forward. Credit unions and other entities may adopt the rules changes for the first quarter financials they are currently preparing, and will be required to adopt them after the second quarter.
The rules changes will allow entities to delay taking so-called other-than-temporary impaired charges on distressed securities if they assert they do not have an intent to sell the securities and it is more than likely they will not be forced to sell the securities. The old rules required that the entity have an intent and ability to hold the securities to maturity.
In addition, entities would be able to use conditions other than market values in the current distressed markets, such as the ongoing cash flow and the expectation of receiving all interest and principal payments, to determine market value. "Once you have an underwater security you have to say ‘are you going to collect all your cash flows,’" said Board member Leslie Seidman.
Another change will allow the entities to separate out on their books expected losses on securities from the mere diminishment of market value, reporting the expected losses on the income statement while reporting the market diminishment–the mark-to-market--on the other comprehensive income portion of the financial statement.
The changes will allow credit unions, mostly corporate credit unions holding vast amounts of distressed securities on their books, to delay realizing some of the billions of dollars in unrealized losses on those securities, mostly mortgage backed securities.
During the debate, on of the five Board members worried that the new rules will allow entities to defer when they have OTTI. He cited a comment letter from Southwest Corporate FCU saying the Dallas corporate sees the change as a significant change on determining when they have OTTI.
The changes come after a withering lobby by the credit unions and banks and just three weeks–an extraordinary short time for changes in accounting rules–after Congress threatened FASB Chairman Robert Herz with its own actions unless the Board agreed to ease mark-to-market accounting rules.
Dozens of credit unions, urged on by their corporates with directions and model letters, submitted comment letters urging the rules changes. Many of the letters had identical language. The corporate system is sitting on more than $20 billion of unrealized losses on its securities and will have to take charges on a lesser amount under the rules changes. More than half of those losses are on the books of U.S. Central FCU and WesCorp FCU, which were taken under federal conservatorship on March 20. But six others of the nation’s largest corporates also have significant unrealized losses on their books.
