The Financial Accounting Standards Board moves away from mark-to-market accounting and closer to IFRS.
The Financial Accounting Standards Board Tuesday backed away from its proposal calling for mark-to-market accounting on bank loans, moving it a step closer toward international accounting standards. The mark-to-market or fair-value approach for all loans was in stark contrast to the International Accounting Standard Board’s preference, which amortizes the cost for loans and debt – the current practice of banks.
The latest move inches the FASB toward full convergence with International Financial Reporting Standards (IFRS), which the US has been considering for years. Moving them toward the Standard received a serious push when Robert Herz stepped down as chairman of the FASB and was replaced by a more IFRS-friendly chairman. In addition, two seats were added to the board and there were reports that they were also filled with “let’s get convergence done”-type players (see related story here).
Negative feedback
The FASB’s proposal on fair value for bank loans was never popular and generated more than 2800 letters — most of them in opposition. One letter from Freedom Bank in Connecticut pointed out that fair value doesn’t make any sense because investors don’t want that information. “Investors are interested in how loans perform, not how the market views loan performance.”
Another pointed out the lack of market for loans and therefore the impossibility of valuing them. The proposal makes sense “for loans that will be sold,” wrote Charles Niemier of Lakeland Financial Corporation in Indiana. However, “the vast majority of the loans on the balance sheet are commercial loans with unique terms, collateral and guarantee structures, and payment streams. There is simply no market into which these loans could reasonably be sold.”
Timeline
Both the FASB and the IASB have said that 2011 is the year that convergence officially worked out, with an implementation plan the SEC suggests could be about four to five years. Canada and Korea have said they will adopt this year as well and a host of other countries in 2012. For the FASB, knocking out fair value is a significant step. The next projects that need to be cleared up for convergence, according to the FASB and the IASB, include:
- Financial Instruments, which includes:
-Classification and Measurement Off-Balance Sheet−Derecognition
-Impairment Consolidations
-Hedging Insurance Contracts
-Balance Sheet Offsetting of Derivatives and Other Financial Instruments - Revenue Recognition
- Leases
- Presentation of Other Comprehensive Income
A third way
Still, some feel the two boards are far enough apart that it could mean adoption in 2012. Not only that, but there are suggestions that FASB is dragging its feet perhaps because it feels that convergence puts it out of business or at least out of control. For this reason, Fitch Ratings feels that there will be quasi-adoption or a compromised solution, which is described as the “condorsement” strategy.
This clever (or not) portmanteau was reportedly coined by a senior SEC official, according to Fitch, and combines the words convergence and adoption. In Fitch’s view, condorsement “will preserve both US GAAP and IFRS while both standards converge over time. After standards are converged, a body, which is likely to be the FASB, will then have to endorse future IFRS on a standard-by-standard basis similar to the ratification process of the EU.”
Fitch wrote that if successful, condorsement “not only preserves the FASB’s existence, but also preserves some measure of control of the standards that will be incorporated into US GAAP.”