The Financial Accounting Standards Board decision to exempt debt and equity securities from the proposed loan impairment draft gives scant comfort to the head of the American Bankers Association's Accounting Committee.
"They'll still be covered in the market value proposal and we still have objections to the impairment proposal," said Bill O'Halloran, who also is senior vice president/comptroller of Atlanta-based Sun Trust Banks.
O'Halloran said bankers still hope they can persuade FASB to ease the impact of both proposals--specially the market value document, which sets strict conditions for determining securities that are held to maturity and therefore exempt from market valuation.
Marketable securities were removed from the scope of the loan impairment draft to avoid possible conflict with another impairment measurement method in the mark-to-market proposal for debt and equity securities.
FASB expects to issue the market value proposal for comment in September. The loan impairment draft is out for comment until Sept. 30.
At the center of the conflict are debt and equity securities that are held to maturity and that are covered under both proposals.
The loan impairment draft covers collateralized and uncollateralized loans, except those that are carried at fair value or at lower-of-cost or market value. Such loans would include certain accounts receivables, notes receivable and convertible or nonconvertible debentures and bonds.
Under the draft, impairment would be measured at the present value of expected future cash flows discounted at the loan's effective interest rate.
The effective interest rate is the original interest rate on the loan agreement adjusted for any deferred loan fees or costs, premium or discount existing when the loan negotiation began.
Under the so-called market value proposal, entities will be allowed to carry certain investment securities at amortized cost so long as they can show intent and ability to hold those securities to maturity. Trading and held-for-sale securities would be marked to market, with unrealized gains and losses going through income and shareholders' equity, respectively.