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By Melissa Hoffmann Lajara
Posted on 4/16/09
NORWALK, CONN. -- The Financial Accounting Standards Board (FASB), responding to pressure from a host of sources, voted April 2 to approve three staff positions that, in effect, relax the mark-to-market accounting rules that some blame for exacerbating the credit crisis and economic downturn.
The FASB’s quick action—and its unusually short two-week comment period—was prompted, at least in part, by the threat of congressional action to change the standards. At a House subcommittee hearing March 12, FASB Chairman Robert H. Herz promised lawmakers he would resolve issues with fair value via FASB staff positions (FSPs) within three weeks, while fair value cemented its position in the public arena.
“It’s definitely unprecedented that the FASB would put something out on March 17 and say you have to answer by April1, this time of year and all,” said Howard M. Gluckman, immediate past chair and member of the NYSSCPA’s Banking Committee.
Anna Zubets, a member of the NYSSCPA’s Financial
Accounting Standards and Auditing
Standards committees, noted one problem with
short comment periods: “When you have such a short exposure period,
the constituents that will respond have been following the issue all
along.” In this case, she said, those constituents were bankers—not
investors.
“
We would like to emphasize that the FASB acted within its established
minimum timeframe,” said Financial Accounting Foundation President
Teresa Polley, quick to defend the short public comment period at
a press conference the day of the vote. “The process, while
accelerated, was substantive.”
Allan Tepper, a member of the Society’s Banking Committee, said that while he agrees with the FASB’s modifications, the process was less than ideal.
“This all happened under a tremendous amount of political pressure,” he said. “Herz was in a difficult spot. He got caught in a reactive situation and that’s not good. I don’t think it helps to make decisions under pressure, but sometimes you have to respond to the politics out there. At least [the standard setters] stayed independent, even if there are political pressures. Congress didn’t take over and start creating a rule-setting body. I think that’s healthy.”
Less healthy, perhaps, was the attention paid to fair value, which catapulted an obscure accounting rule into the mainstream consciousness, stirring controversy and creating an intense debate in the media.
“With comments from political leaders [and] on TV, the profession became defensive,” Tepper said, “as opposed to saying ‘there may be some truth to this.’”
“Sometimes,” he continued, “when new information comes to light, the profession has to step back and provide additional clarity.”
Independence and Standards Setting
The International Accounting Standards Board, in some senses the FASB’s international counterpart, has recently come under fire for its own response to political pressure over fair value. Sir David Tweedie, chair of the IASB, admitted he bowed to pressure in October when the standards setter allowed banks to move assets out of the fair value category retroactively to July 1, 2008, which Moody’s said allowed banks to avoid recognition of some mark-downs.
Has the independence of the FASB been compromised in these deliberations in the United States? According to Jo Ann Golden, a member of the NYSSCPA’s Financial Accounting Standards Committee and a past Society President, it’s difficult to tell. She noted that standards setters have to answer to many different audiences with different priorities, such as the profession and the public-at-large.
“I would even add a third group there—the government itself—because when you’re talking about the FASB, it’s really a nongovernmental body, and so you also have government regulators in there too, putting pressure,” she said. “There’s sort of this pressure coming from all sides.”
But she said it’s often hard to be certain whether the FASB is responding to one particular group over another. “It’s difficult to determine whether independence is really impaired,” she said.
“I think the FASB handled political pressure a little bit better than the IASB did,” Zubets said. “In the IASB’s case, they changed a rule. It used to be, internationally, once you put an asset in a trading category and measured it at fair value, you couldn’t pull it out of there. In the U.S., you could, but it’s very rarely done.”
Zubets said that changed during the financial crisis when “a lot of banks in the U.S. did reclassify. International companies were specifically precluded from doing that, and they started bearing down on the IASB to basically change the rules to conform to U.S. [generally accepted accounting principles]. The IASB did that, but without due process.
“That’s different,” she said, “than offering guidance with a shortened due process. The FASB only had a two-week exposure period, and that was very short—but there was an exposure period.”
The IASB appears to be following the FASB’s lead on fair value.
“Once the FASB has finalized the FSP on fair value measurement … the IASB staff will assess whether the FSP could lead to different results in practice,” the IASB said in its April 7 statement.
The IASB noted that that the concept of other-than-temporary impairments does not exist in IFRS in any way resembling the United States’ version.
“The IASB recognizes the need for rapid consideration of these issues, which was anticipated by the shortened consultation period,” the international standards setting board stated, adding that a decision will be made in late April as to whether further guidance on the application of fair value in inactive markets and impairment of debt securities is required.
The day after FASB’s fair value FSPs were approved, European Union finance ministers called for European companies to get the same kind of treatment and said they wanted to see rapid action, sweeping aside concerns from the IASB that they should take up to six months to weigh radical reform, according to a report in the Los Angeles Times.
A Need For Change?
Fair value accounting standards were in the hot seat nearly from the start of the credit crisis, and were deliberated a number of times, by a host of agencies and committees, in the year following. The FASB’s own Valuation Resource Group recommended clarification and changes at its Feb. 5 meeting, and the Securities and Exchange Commission (SEC) held several roundtables on mark-to-market accounting, which culminated in a compulsory study that recommended that fair value standards not be eliminated, but be improved.
But did fair value cause the financial crisis? From CPAs to bankers to Nobel-prize-winning economist Paul Krugman, the consensus is ‘no.’
“There’s a lot of finger-pointing as to where the blame lies, and stepping back … can really help things,” Golden said.
“We accountants don’t believe accounting caused any of this economic mess. Maybe … it made things more difficult, but it didn’t cause it,” said Gluckman. “Changing accounting standards isn’t going to get us out of this mess. We’re going to have to get out of it by restructuring financial instruments so they become viable.”
Tepper concurred. “These assets would have been written down anyway, though maybe not as dramatically,” he said.
“What they’re trying to address is some of the very difficult problems faced when trying to apply fair value, especially other-than-temporary impairments,” Gluckman said. “They’ve tried to address some of the areas … whether results have been untenable and in current conditions almost impossible to operate.”
Are these FSPs the answer? “I think what they’ve come up with now is better than the original,” Tepper said.
“I think the final FSPs are pretty good,” Zubets said. “They depend a lot on management judgment. In the market conditions we have, it’s important to have guidance. Whether this guidance will be abused is a whole different issue. It’s a possibility.”
Golden said that she believes the increased disclosures required in the new FSPs “help define how things are valued,” providing more relevant information to investors and decision makers.
“There were all these new products created, and we were trying to fit them into baskets that already existed,” Golden said. “[It’s like] putting the right foot into the left shoe .... It’s somewhat there, but not quite fitting right. The whole idea of better definitions going forward will help create confidence in the market. I think that’s what everyone’s after here.”
NYSSCPA Accounting and Review Services Committee member Ira Talbi
disagreed.
“
It will probably lead to manipulation of the numbers,” he said. “The
weakening of the standards was set in motion to increase the capital
reserves at financial institutions. Nothing has changed in those
institutions—only the accounting for the value of those assets
has changed.”
Two of the FSPs up for vote April 2 deal with fair value; the third applies to other-than-temporary impairments [OTTI] of securities, including mortgage-backed securities.
Golden called the FASB’s rollback “a logical move” as the original rules attempted a one-size-fits-all approach. “We need to break things out into … pieces so they become more understandable when we deal with them. When you try to make rules that apply to everyone and everything, all at once, you really are doomed to failure,” she said.
