Alert April 07, 2009

FASB Revises, Adopts, Two Pivotal Staff Positions on Fair Value Determinations and Other-Than-Temporary Impairments

The Financial Accounting Standard Board (the “FASB”) considered public comments to its proposed staff positions (the “Staff Positions”) on financial reporting. FASB Staff Position FAS 157-e (“FSP FAS 157-e”) addresses fair value measurements, and FASB Staff Position FSP FAS 115-a, FAS 124-a, and EITF 99-20-b (collectively, “FSP FAS 115-a”) address other-than-temporary impairments.  The Staff Positions are expected to be issued in final form later this week.  Subject to certain conditions, they are to take effect for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 157-e and FSP FAS 115-a were discussed in the March 24, 2009 AlertThe FASB approved those positions subject to certain modifications. 

  • With respect to FSP FAS 157-e, the FASB, among other things, reaffirmed that fair value should be a measurement of the price that the reporting entity would receive to sell the security in an orderly market.  Moreover, in the two-step process for determining whether a market is inactive and a transaction is distressed, the FASB removed from the original proposal the presumption that a transaction in an inactive market is distressed.  As modified, FSP FAS 157-e requires the entity to evaluate whether a transaction in an inactive market represents an orderly transaction. 
  • With respect to FSP FAS 115-a, the FASB determined to limit the positions to debt securities.  In addition, the FASB also determined, among other things, to replace the existing requirement that management of the reporting entity assert that it has the intent as well as the ability to hold an impaired security until recovery with a requirement that management assert that (a) it does not have the intent to sell the security, and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis.
The Staff Positions have given rise to conjecture that reporting entities, which include many banks and mutual funds, will have more flexibility in valuing the assets on their balance sheets. Indeed, an FASB staff handout made it clear that in adopting FSP FAS 157-e as modified, the FASB is recognizing that establishing the fair market value of an asset when the volume and activity in the market for that security has decreased significantly is “inherently complex, depends on the facts and circumstances and involves significant professional judgment.” Some have expressed concerns about the potential impact of this purported flexibility on the Treasury’s nascent Public-Private Investment Program (the “PPIP”), which was discussed in the March 24, 2009 Alert. The American Banker cited Dennis Beresford, a former FASB chairman now teaching accounting at the University of Georgia, who posited that, on the sell side, banks will have less of an incentive to sell their bad assets through the PPIP as they will be under less pressure to rid themselves of them, now that they have a more favorable accounting treatment under the Staff Positions. The American Banker also interviewed a private equity advisor who theorized that, on the buy side, private equity investors would become more skittish about participating in the PPIP, out of fear that the value of the assets they would be buying could be distorted due to the Staff Positions. Both statements also could apply to mutual funds, which may find themselves on the sell side or buy side.