Financial Accounting Standards Board

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Lucinda Watson
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1 Financial Accunting Standards The Hnrable Jhn D. Dingell, Chairman Subcmmittee n Oversight and Investigatins Cmmittee n Energy and Cmmerce 2125 Rayburn Huse Office Building Washingtn, DC Dear Mr. Chairman: In cnnectin with yur subcmmittee's hearing t be held n April 23, 1987 t discuss differences between generally accepted accunting principles and regulatry accunting in the thrift industry, the Financial Accunting Standards Bard (FASB) is pleased t submit this letter discussing FASB invlvement in evaluating initiatives by regulatrs t establish regulatry accunting requirements that differ frm generally accepted accunting principles. On three ccasins, July 22 and Nvember 7, 1985 and April 24, 1986, representatives f the FASB have submitted statements r testified befre yur subcmmittee n differences between generally accepted accunting principles and regulatry accunting. In additin, the staff f the FASB met with the staff f the subcmmittee n June 7, 1985 t discuss these issues. Rles f Regulatry and General Purpse Financial Reprting The FASB's bjective is t establish and imprve standards fr general purpse financial accunting and reprting fr the guidance and educatin f the public, including issuers, auditrs, and users f financial infrmatin. Accunting standards are essential t the efficient functining f the ecnmy because decisins abut the allcatin f resurces rely heavily n credible, cncise, and unders tandab 1 e fin anc i a 1 in frmatin. Bus i ness en terpr is es, including thrift institutins, that present financial statements that purprt t be in accrdance with generally accepted accunting principles must cmply with the prnuncements f the FASB.

2 The Hnrable Jhn D. Page Tw Dingell The develpment f different regulatry and general purpse reprting requirements has been a result f the differing needs and bjectives f regulatrs and ther users f financial infrmatin. The bjective f general purpse financial statements is t prvide useful, representatinally faithful infrmatin t a wide grup f investrs, creditrs, and ther users. While recgnizing that the special needs f regulatrs may differ frm thse f investrs, creditrs, and ther users f general purpse financial statements, the FASB has cnsistently maintained that general purpse financial statements shuld be neutral and unbiased. Many financial institutins prvide users with financial statements prepared in accrdance with generally accepted accunting principles. Still thers furnish users with financial statements prepared in accrdance with generally accepted accunting principles that include supplemental disclsure f certain amunts determined in accrdance with regulatry accunting practices. Hwever, sme financial institutins prvide users, including depsitrs, with nly financial statements prepared in accrdance with regulatry accunting practices. If regulatrs require additinal infrmatin r wish t have enterprises accunt fr certain transactins in a manner differently than wuld be permitted under generally accepted accunting principles, the FASB believes that the resulting adjusted financial infrmatin shuld be furnished separately t regulatrs and shuld nt be included in the basic financial statements. Financial statements furnished t the pub1 ic must be prepared under cmmn grund rules if users are t base ecnmic decisins and actins n that financial infrmatin. Mdifying financial statements--even if designed fr nly regulatry purpses-s that they are n lnger a faithful representatin f an enterprise's financial psitin and results f peratins is likely t cnfuse r mislead users and impair the credibility f financial reprting by financial institutins. FASB actins n regulatry assistance prpsals In the past, the FASB r its staff has reviewed and cmmented n a number f prpsals by agencies t prescribe regulatry accunting practices t prvide a means fr enterprises t meet minimum capital adequacy requirements that wuld nt be met under generally accepted accunting principles. FASB representatives als have testified befre Cngressinal cmmittees n the differences between generally accepted accunting principles and regulatry accunting. Each respnse has acknwledged that Cngress and regulatry agencies have the authrity, either thrugh legislatin

3 The Hnrable Jhn 0. Oingell Page Three r thrugh their wn vlitin, t mdify r prvide temprary r extended relief frm existing laws and rules t tlerate financial cnditins f regulated enterprises that in times f less ecnmic stress might nt be acceptable. Hwever, the FASB has bjected cnsistently t prpsals t include in financial statements issued t r therwise available t the public, representatins that are nt in accrdance with generally accepted accunting principles because they wuld be cnfusing and misleading. Many f the letters that are described n the fllwing pages have been furnished previusly t the subcmmittee. In rder fr the public recrd t be cmplete, cpies f all letters have been included as an appendix. In respnse t a prpsed rule cncerning the accunting fr gains and lsses frm the sale f mrtgage assets that was released fr cmment by the Federal Hme Lan Bank Bard (FHLBB) n August 13, 1981, Mr. J.T. Ball f the FASB staff in a letter dated September 11, 1981 discussed the FASB staff's views n this matter. In a letter dated September 16, 1981, FASB Chairman Dnald J. Kirk indicated that the staff respnse had been discussed at the September 16, 1981 Bard meeting and that the Bard endrsed the views expressed in the staff letter. In respnse t a request frm Mr. James 0. Sivn, Minrity Staff Directr f the Cmmittee n Banking, Finance and Urban Affairs f the U.S. Huse f Representatives, Mr. J.T. Ball f the FASB staff in a letter dated May 19, 1982 discussed the staff's cnclusins n the prvisins f the Net Wrth Guarantee Act. Mr. J.T. Ball f the FASB staff in a letter dated Octber 12, 1982 respnded t a prpsed rule regarding amendments t net wrth an'd statutry reserve requirements issued fr cmment by the FHLBB. Such prpsed rules wuld have permitted a savings and lan assciatin t include "Appraised Equity Capital" as an ff-balance-sheet item in cmputing statutry reserves. In February 1983, the FASB issued FASB Statement N. 72, Accunting fr Certain Acquisitins f Banking r Thrift Institutins, which addresses the accunting fr regulatry-assisted business cmbinatins. It als prescribes accunting fr the amrtizatin f intangible assets resulting frm acquisitins f financial institutins in which the fair value f 1 iabil ities assumed exceeds the fair value f assets acquired.

4 The Hnrable Jhn D. April.15, 1987 Page Fur Dingell In respnse t a letter frm the AICPA's Accunting Standards Executive Cmmittee (AcSEC), Mr:J.T. Ball in a letter dated Nvember 23, 1983 discussed the staff's cnclusins n the net wrth certificate prgram f the Federal Savings and Lan Insurance Crpratin. The staff cnclusins were cnsidered and endrsed by the Bard at its Nvember 16, 1983 Bard meeting. In respnse t a request frm the staff f the Securities and Exchange Cmmissin cncerning the apprpriate accunting fr the issuance f an instrument termed a permanent incme capital certificate (PICC), Mr. James J. Leisenring f the FASB staff in a letter dated March 28, 1986 discussed the FASB staff's views n this matter. In a letter dated March 28, 1986, FASB Chairman Dnald J. Kirk indicated that the staff respnse had been discussed at the March 27, 1986 Bard meeting and that the Bard endrsed the views expressed in the staff letter. The staff letter was the basis fr a prtin f the FASB's April 24, 1986 testimny befre yur subcmmittee. I In respnse t a prpsed rule cncerning the definitin f regulatry capital that was released fr cmment by the FHLBB n April 24, 1986, Mr. James J. Leisenring f the FASB staff in a letter dated July 29, 1986 discussed the staff's views n the prpsed rule. In that letter, the FASB staff agreed with the prpsed rule that wuld require thrift institutins t return t reprting in accrdance with generally accepted accunting principles. T date, the prpsed rule has nt been adpted. Recent FASB actins regarding regulatry accunting In 1987, the FASB has respnded t a number f Cngressinal initiatives designed t have financial institutins that are experiencing financial difficulty because f lan cncentratins in certain trubled sectrs f the ecnmy mdify their reprting t avid timely recgnitin f lsses that have been incurred.! In respnse t prpsed temprary regulatins regarding the implementatin f the prvisins f the Farm Credit Act Amendments f 1986, Mr. James J. Leisenring f the FASB staff in a letter dated February 23, 1987 discussed the staff's views n the prpsed regulatins. In respnse t legislatin prpsed in H.R. 1063, the "Thrift Frbearance and Supervisry Refrm Act,'' Mr. James J. Leisenring f the FASB staff in a letter dated March 11, 1987 t the Hnrable Rnald L. Wyden and letters dated March 18, 1987 t the Hnrable Fernand J. St Germain and t the

5 The Hnrable Jhn 0. Dingell Page Five Hnrable Steve Bartlett discussed the staff's views n this prpsed legislatin. On March 10, 1987, representatives f the FASB staff met with certain staff members and aides t members f the Cmmittee n Banking, Finance and Urban Affairs t discuss with them the FASB's cncerns regarding the prpsed legislatin. In respnse t legislatin prpsed in Amendment 51 t S. 790, the "Cmpetitive Equality Banking Act f 1987," Mr. James J. Leisenring f the FASB staff in a letter dated March 31, 1987 t the Hnrable William Prxmire discussed the staff's.views n this prpsed legislatin. On April 2, 1987, Mr. James J. Leisenring f the FASB staff testified befre the Subcmmittee n Internatinal Finance and Mnetary Plicy f the Cmmittee n Banking, Husing, and Urban Affairs f the United States Senate n certain aspects f accunting standards affecting Third Wrld debt. In respnse t legislatin prpsed in S. 898, the "Internatinal Lending Institutin Safety Act f 1987," Mr. James J. Leisenring f the FASB staff in letters dated April 14, 1987 t the Hnrable William Prxmire and t the Hnrable Phil Gramm discussed the staff's views n this prpsed 1 egis 1 at i n. The FASB is cncerned abut the grwing prpensity f the Cngress t cnsider legislatin that wuld permit r require financial institutins experiencing difficulty t mdify their reprting s as t avid timely recgnitin f lsses. If the intent f Cngress in such legislatin is t permit the cntinued peratin f financial institutins that d nt meet previusly defined requirements fr capital adequacy, the FASB believes that bjective is better achieved thrugh amending thse requirements r frbearing supervisry actin t enfrce the requirements rather than thrugh mdificatins t financial statements. The FASB is cncerned abut the need t maintain the credibility f financial reprting. The discipline f financial reprting and the resulting financial statements are used by numerus segments f sciety as a basis fr ecnmic decisins and actins. Investrs and creditrs use individual financial statements as a basis fr decisins abut individual entities. Gvernment departments and regulatry agencies use bth individual financial statements and aggregate statistics cmpiled frm financial statements in making pl icy and regulatry decisins. Thus, the financial reprting system and the resulting financial statements play an imprtant

6 The Hnrable Jhn D. Page Six Dingell rle in the efficient functining f the natin's capital markets. Financial statements must have the primary characteristic f neutrality t be effective. If the financial reprting system were t lse its neutrality, r t be perceived as having lst it, the effectiveness f the system wuld be diminished because the resultant financial infrmatin wuld be suspect. If yu wuld like t discuss these matters further, please cntact me. The members and staff f the FASB wuld be mst willing t meet with yu r yur staff t discuss ur cncerns. Very truly yurs, Dennis R. Beresfrd V DRB/5688S

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