- Sign up for our FREE Newsletter
Have A Question?
We'll get right back to you.
| Follow Us: |  |
 |
A U-Turn on Fair Value Accounting
2/3/2011
The Financial Accounting Standards Board recently reversed its position requiring across-the-board recognition of financial assets and liabilities on a fair value basis. This was in response to very negative feedback that FASB received to its May 2010 proposal.
The proposal would have required measurement of loan portfolios on a fair value basis with changes reported in “other comprehensive income.” It would have also required that deposit liabilities be measured on a fair value basis.
FASB received over 2,800 responses to its proposal. Responses critical of the proposal noted that “the rules are antithetical to the business model of holding on to a loan and collecting the payments rather than selling to a third party.” Also, many respondents argued that the high cost of periodically measuring loan portfolios and core deposits on a fair value basis could not be justified. The proposal was more far reaching than the position of the International Accounting Standards Board and threatened convergence of accounting standards.
In last week’s decision, FASB indicated that the method of accounting would be determined by how companies manage assets. Those assets that are managed for the collection of contractual cash flows through a lending or customer financing activity should be accounted for at amortized cost. Financial instruments that are held for sale or actively traded will be carried at fair value, with changes running through the income statement. Those that are utilized to manage risk exposure will be carried at fair value with changes reflected in other comprehensive income. Reclassifications between the three categories won’t be permitted, but FASB will be studying disclosure alternatives for financial assets accounted for at amortized cost that are subsequently sold.
Final decisions on accounting specifics won’t be made until June 2011, as part of the presentation of wide-ranging reforms that cover revenue recognition and the presentation of comprehensive income.