The Financial Accounting Standards Board has agreed on a tentative position it could adopt if it decides to resolve problems in amortized cost accounting rather than attack market value accounting for securities.
The agreement came after the board directed its staff to set aside its work on market value accounting and concentrate awhile on repairing apparent weaknesses in amortized cost accounting.
The seven-man board studied 14 possible approaches the staff drew up and agreed that entities must show positive intent and ability to hold investment securities to maturity to be allowed to carry the instruments at amortized cost. As a consequence, securities must be classified as held-for-sale and carried at the lower of cost or market value if they are carried for indefinite periods of time, used as part of an institution's asset-liability management strategy, or sold as a result of changes in interest rate or prepayment risk.
Project manager Robert C. Wilkins made clear the board has not given up on fair value accounting, despite disagreements among members over which approach to use in valuing related liabilities.
At this juncture, it is uncertain where the board is heading. But the mere fact that the members are even considering addressing cost-related problems indicates that developing an accounting standard for marketable securities could take years.
"The board may be sending a signal that it may not be able to come up with an acceptable standard by the end of this year as the (Securities and Exchange Commission) and some lawmakers would like." said one banking industry official.
The board's decision is a crucial first step to what seems to be a more workable approach to the problem of accounting for debt and equity investment securities, banking industry observers say.
Significantly, FASB'S decision puts it in the same direction federal thrift and banking regulators took last year in dealing with so-called "high-risk securities." Efforts by the Federal Financial Institutions Examination Council culminated in more stringent regulation of securities-related activities of banks and thrifts.
The updated FFIEC guidelines, which target mortgage-backed securities, retain current regulatory accounting for debt securities. The current standards allows entities to carry securities at amortized cost, with market values disclosed in footnotes of financial statements.
The rules generally prohibit institutions from holding high-risk instruments for investment purposes unless they can show sufficient knowledge, resources and expertise in handling the portfolio.
The guidelines also require securities held for trade to be marked to market, while those held for sale to be reported at LOCOM. E)