Bankers Welcome FASB Repeal of Long-Disputed Debt-Valuation Rule

Banking industry officials hailed changes Tuesday 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 multifaceted 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, experts at two banking trade groups said.

"It is [part of] the tortured debate about mark-to-market accounting," said Donna Fisher, a senior vice president of tax and accounting at the American Bankers Association. The feedback that the FASB had gathered from investors was "extremely important" in influencing its decision, she said.

James Kendrick, vice president for accounting and capital policy at the Independent Community Bankers of America, also welcomed the move.

"It's a major victory for community banks," he said.

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 counterintuitive, 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, nonprofits 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.

Bitter fights between bankers and accounting standards-setters are common. For example, community bankers are engaged in a last-ditch effort to persuade the FASB to back off a separate plan to require lenders to estimate future losses on all loans they make. That proposal would require banks to provision for projected losses over the lifetime of a loan on the day they book it, instead of the current practice of adding to provisions only when losses start to accrue.