The Financial Accounting Standards Board on Tuesday released the final versions of two controversial accounting changes.
The final rules, which contained no surprises, were approved despite the long-standing objections of the banking industry and its regulators.
One rule will result in more investment securities being recorded on financial statements at market value. Currently, most securities are valued at historic cost. The other measure changes accounting procedures for nonperforming loans.
Equity Securities Addressed
The market-value rule, described in FASB Statement 115, addresses equity securities - which have a readily determined fair value - in addition to debt securities.
The rule is effective for financial statements for the calendar year 1994, but may be applied to an earlier fiscal year for which annual financial statements have not been issued.
The statement classifies securities in three categories:
* Debt securities that a bank has the positive intent and the ability to hold to maturity; these securities should be classified as held-to-maturity securities and reported at amortized cost;
* Debt and equity securities that are bought and held principally to be sold in the near term; these should be classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
* Debt and equity securities that do not fall into either of the above categories; they should be classified as available for sale and reported at fair value with unrealized gains and losses excluded from earnings and shown as a separate component of shareholders' equity.
FASB project manager Robert C. Wilkins noted that under the new rule, "securities that may be sold in the future because of changes in interest rates or other factors will no longer be classified as held to maturity."
The rule affecting impaired loans, described in FASB Statement 114, requires banks to take into account the expected loss of interest income on nonperforming loans when calculating loan-loss reserves.
Some banks currently base reserves only on projected losses of principal. As a result of the change, some of those institutions may have to step up their loan-loss provisions.
The rule, which is effective for fiscal years beginning after Dec. 15, 1994, requires that specified impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate.
That rate is defined as the contractual interest rate adjusted for any deferred loan fees or costs, premium, or discount existing at the inception or acquisition of the loan.
FASB project manager Carol Clarke said that the rule "also allows creditors, as a practical expedient, to measure the loan at its observable market price or the fair value of the collateral if the repayment of the loan is expected to be provided solely by the underlying collateral."
The rule applies whether or not an impaired loan is collateralized. It also applies to all restructured loans that have involved a modification of terms.
It does not apply to large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or the lower of cost or fair value, and leases.