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Fair Value Twist

FASB's new guidance on where on financial statements 'impaired securities' should be reported prompts a heated response.

By Dave Lindorff | Updated on May 01, 2009

In a hotly debated and controversial move, the Financial Accounting Standards Board (FASB) voted 3 to 2 in favor of new guidelines for all public companies to follow in accounting for impaired securities, such as mortgage-backed securities. The new guidelines on reporting on what are called “other than temporarily impaired” (OTTI) securities, came in the wake of threats by the House Finance Committee to pass legislation ordering the change, and after intense lobbying by many banks. The requirements were adopted in conjunction with two other guidelines, which essentially reaffirmed the FASB’s original principles of fair value or market-to-market accounting in FAS 157, and increased the frequency for reporting on the fair value of financial instruments from annually to quarterly.

According to FASB, the new guidelines, which go into effect June 15, but can be applied effective March 15 on a voluntary basis, do not affect when a company recognizes impairment, but could change where in the financial statements an impairment is reported. “Under the current rules,” the board explains, “unless the severity and duration of a drop in fair value is too great, if a company can assert that it intends and is able to hold a security until the fair value recovers, it need not record an impairment charge on the income statement. The new proposal the Board approved indicates that no impairment charge is required if there is both no current intention to sell and, it is more likely than not, that it will not be required to sell prior to the fair value recovering.”

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