This is a very sad day for the accounting profession, allowing politics to influence accounting standards.
http://www.webcpa.com/article.cfm?ARTICLEID=31223
Norwalk, Conn. (April 2, 2009)
By Michael Cohn
Under pressure from Congress to act quickly, the Financial Accounting Standards Board voted to approve substantial changes to fair value accounting.
While two of the votes on the proposed FASB Staff Positions were unanimous on the five-member board, another vote on the controversial issue of other-than-temporary impairments was opposed by two of the members, Thomas Linsmeier and Marc Siegel, who had originally voted against issuing the proposed standards a few weeks ago.
The votes came after the board received over 600 comments within just two weeks (see FASB Issues Fair Value Proposals), including many urging the board to resist pressure from Congress and the banks. “The vast majority of the preparer letters opposed this,” said Leslie Seidman.
FASB Chairman Robert Herz (pictured) was pressed by angry members of a House Financial Services Subcommittee to come up with the modifications within three weeks or face another hearing, or congressionally mandated changes to accounting standards (see Congress Presses FASB to Revise Mark-to-Market).
During the FASB board meeting, he referred to his testimony before Congress alongside SEC acting chief accountant James Kroeker as the “lovefest for Bob Herz.” He added, “One of the unfortunate things in this FSP is that we have to take this responsibility on, rather than have the regulators do it.”
Despite the rushed schedule, the board members insisted later at a press conference that they had conducted a thorough due diligence process and read through many of the comment letters they had received. One critical comment letter in particular, from the CFA Institute, had weighed heavily on at least one of the board members. They also said that they met with investor groups, including hedge funds and pension funds, as well as financial institutions.
Among the changes voted on in the proposed standards will be requirements for companies to add more disclosures to clarify the new value of the impaired assets. The disclosures will also be more frequent, coming in the quarterly financial statements, rather than only in the annual statements.
Timing was also a critical issue, as the board was under pressure to allow banks to include the changes in the quarterly statements that will be due out soon. The FASB staff recommended that all three proposed standards apply to interim and annual periods ending after June 15, 2009, but allow for early adoption for periods ending after March 15, 2009. The board agreed, and plans to issue the final FSPs by April 10, as many banks are expected to issue their quarterly statements around April 17.
“There is the impression that we’re bowing to political pressure,” said one of the board members, Lawrence Smith, who described how staff members had been working late hours to draft the FSPs and pore over the comments. “We are independent standard-setters, but how can we ignore what’s going on around us? People are recognizing that the markets seem to be in turmoil.”
Here is a link to a New York Times article on the same subject:
http://www.nytimes.com/2009/04/03/business/03fasb.html?th&emc=th
UPDATE: The following article illustrates the impact of the rule change.
http://www.webcpa.com/article.cfm?ARTICLEID=31351
Goldman, Citi Accused of Accounting Tricks
New York (April 21, 2009)
By WebCPA staff
Goldman Sachs and Citigroup reported better than expected financial results last week, but critics are complaining that the two banks bended accounting rules to boost their earnings.
Financial institutions won a major victory earlier this month when the Financial Accounting Standards Board voted to loosen the rules for fair value and mark-to-market accounting in time for them to use the revised standards in their quarterly financial statements. But Goldman and Citi also took advantage of earlier rules that allowed them to prop up the bottom line and perhaps repay their government bailout funds a little earlier.
Goldman reported a first-quarter profit of $1.81 billion last Monday, even as it announced a new $5 billion stock offering. However, the bank was able to avoid including $2.7 billion worth of “fair value losses” on commercial real estate loans and other illiquid assets that it wrote down in December within the first-quarter results it reported. The firm was moving from a fiscal year ending in November to a fiscal year beginning in January as part of its decision in September to become a bank-holding company instead of an investment bank.
In the case of Citigroup, which reported its first-quarter results Friday, the revisions to the fair value measurement standard allowed the bank to report a $1.6 billion profit instead of a $900 million loss, as well as swing from a $6.8 billion loss to a $3.8 billion gain in trading profits. Citi was able to book just a portion of the loss on the value of some of its impaired assets, as opposed to the full loss, thanks to the new rules, giving it an extra $413 million in after-tax profits.
A credit value adjustment on its debt also enabled the bank to add $2.5 billion in unrealized gain to its net income. Although Citi’s debt declined in the bond market, the bank was able to book a one-time gain approximately equal to the decline, on the theory that it could buy back its own debt at a discount on the open market, even though it has not actually bought back its own debt.
