IN THE MONEY: FASB Readies Proposal On Fair Value For Loans
By Michael Rapoport
996 words
17 May 2010
Dow Jones News Service
(c) 2010 Dow Jones & Company, Inc.

NEW YORK (Dow Jones)–The battle over whether to expand the use of controversial “fair-value” accounting is about to heat up.

Rulemakers at the Financial Accounting Standards Board are expected to issue a formal proposal in the next couple of weeks to apply fair value to a much broader range of financial instruments, including loans. That would peg the value of a bigger chunk of banks’ assets to the ups and downs of the market–and hence, under current conditions that have eroded loans’ value, it would dramatically reduce some banks’ shareholder equity.

“Any entity that has financial instruments is going to be affected,” said Kevin Stoklosa, FASB’s assistant director for technical activities.

In addition, the FASB plan, if enacted, may make it harder to compare the financial condition of U.S. and foreign banks, since FASB and international rulemakers are going down very different paths in determining how to value loans. . . .

Under the FASB plan, both the fair value of loans and their amortized original cost would be shown on a company’s balance sheet. But the amount that fair value has increased or declined from the loans’ cost would be factored into a company’s assets, and thus into its shareholder equity, as would any changes in fair value from one quarter to the next. In some cases, the changes would also be factored into earnings. . . .

Banks already must disclose the fair value of their loans in the footnotes to their financial statements. Those figures–significant reductions in some cases, given the still-shaky market–make it clear that some banks would see dramatic declines in shareholder equity if changes in fair value had to be applied on the balance sheet. . . .

FASB’s fair-value approach differs significantly from the International Accounting Standards Board’s treatment of the same issue. The IASB’s proposal on accounting for financial instruments would allow the non-U.S. companies under its purview to carry their loans at amortized cost, as long as their business model is to hold onto the loans to collect the cash flows associated with them, instead of selling the loans.

The difference in the two approaches throws a monkey wrench into longstanding plans to bring U.S. and non-U.S. accounting standards closer together. It also raises concerns that analysts and investors may find it difficult to compare the financial condition of U.S. and non-U.S. banks: With the amortized-cost approach, a non-U.S. bank would show higher shareholder equity than if the same bank were located in the U.S.

“If your foundation isn’t the same, the rest of the house isn’t going to look the same,” the CFA Institute’s Peters said.

-By Michael Rapoport, Dow Jones Newswires; 212-416-2176;

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