2. The significant comments raised by respondents are arranged by topic in the following manner:

Transcription

1 Proposed FSP FAS 115-a, FAS 124-a, and EITF b, Recognition and Presentation of Other-Than-Temporary Impairments Comment Letter Summary (as of April 1, 2009) OVERVIEW 1. The comment period for the proposed FSP ended at the close of business on April 1, As of 5:00 p.m. on April 1, 2009, the FASB had received more than 250 comment letters (excluding similarly formatted letters received from various constituents). While the majority of comment letters were received from financial institutions, the pool of respondents also included preparers in other industries, individuals, investors and other users of financial statements, regulatory bodies, accounting firms, business associations, and industry organizations. Their comment letters are available on the FASB s website. In addition to the written responses received from investors and other users, some Board and staff members held discussions with numerous investors and other users to obtain their input on the proposals. That input was discussed by the Board at the April 2, 2009 Board meeting and was included in the Board handout for that meeting. The summary of the issues raised by respondents in comment letters and detailed discussion of these issues are included below. ISSUE SUMMARY 2. The significant comments raised by respondents are arranged by topic in the following manner: a. Other-than-temporary impairment criterion b. Presentation c. Held-to-maturity debt securities

2 d. Bifurcation of other-than-temporary impairment losses e. Estimation of credit losses f. Subsequent accounting g. Disclosure h. Scope of the short-term project i. Effective date and transition. OTHER-THAN-TEMPORARY IMPAIRMENT CRITERION 3. The majority of preparers who submitted comment letters supported the replacement of the requirement that management assert that it has both the intent and ability to hold an impaired security for a period of time sufficient to allow for any anticipated recover in fair value with the requirement that management assert that (a) it does not have the intent to sell the security and (b) it is more likely than not that it will not have to sell the security before recovery of its cost basis to avoid considering an impairment to be other than temporary. Those respondents indicated that the proposed requirement would be more operational than the current requirement. Genworth Financial (CL #205) stated that the modified indicator is more objective and represents an improvement in the operational aspects for determining whether OTTI exists in relation to this factor and will result in more emphasis on the assessment of OTTI based on the underlying analysis of a security. 4. Certain preparers and the majority of auditors, regulators, and users were opposed to changing this requirement for equity securities. Those respondents believe the revised requirements would not be operational for equity securities because equity securities generally do not have contractual cash flows that would allow an entity to assess when the cost basis of the security will be recovered. Certain respondents, including some users, were also concerned that the revised requirements would allow an entity to delay the recognition of an other-thantemporary impairment on an equity security by asserting that it does not intend to sell the security. Additionally, Deloitte & Touche (CL #222) noted that the issues that have arisen in practice generally do not relate to equity securities, but rather to debt securities and, accordingly, the scope of the proposed FSP could be limited to debt securities. 2

3 5. A few respondents were opposed to changing this requirement for both equity and debt securities. CFA Institute (CL #150) expressed concern that the proposed modification may result in significant relaxation of the impairment trigger requirements and, correspondingly, reduced frequency and quality of financial asset revaluations. 6. Some respondents questioned how the guidance in the proposed FSP would interact with other existing factors used to determine whether a security is other than temporarily impaired (that is, whether an entity need only consider whether it intends to sell a security or whether it is more likely than not that it will have to sell the security before recovery of its cost basis). Those respondents observed that although the background section of the proposed FSP noted that other aspects of determining whether a security is other-than-temporarily impaired remain unchanged, the remainder of the FSP and the amendments to other standards only discuss the intent to sell and the requirement to sell and do not indicate how the other existing factors should be considered. The Center for Audit Quality (CL #249) stated that it is confusing to have the guidance on other-than-temporary impairments in several places and recommended that the guidance in the proposed FSP be combined with related existing requirements into one final standard, and the interaction of the new guidance with existing principles should be illustrated. 7. Certain respondents also requested additional guidance on the application of the intent to sell criterion, such as over what period the entity would be required to assert that it does not intend to sell the security. CNA Financial Corporation (CL #37) requested the FSP clarify the coverage period to which these new assertions apply and stated that if the intent of the proposed guidance was to indicate that, once made, the assertion remains in place until recovery in value or changed for acceptable reasons, then acceptable reasons for changing intent need to be addressed in the FSP. The letter from Costco Wholesale (CL #274) stated that a discussion or list of examples of acceptable reasons as to a change in intent would also be helpful to guide management in its assessment. Additionally, KPMG (CL #220) requested the Board clarify whether an entity should base its evaluation of whether it is more likely than not that it will sell (or will be required to sell) a security prior to recovery only on events that are known as of the measurement date or whether an entity should consider the possibility of the occurrence of future events as well. 3

4 8. American Council of Life Insurers (ACLI, CL #268) recommended adding the following language, found in the insurance industry s statutory accounting guidance, to the FSP: OTTI has occurred if the investor intends within the foreseeable future to sell the security and this intent is known as of the reporting date or it is more likely than not that the investor will be required to sell the security before recovery of its cost basis. In determining this likelihood, the investor should consider whether its cash or working capital requirements and contractual or regulatory obligations indicate that the investment may need to be sold before the forecasted recovery occurs. ACLI believes the addition of this language would make the guidance more operational by outlining the required timing for intent and the types of considerations applicable when determining when an entity is required to sell their securities. 9. A few respondents requested the Board clarify what effect modifying this criterion would have on the analysis of whether an other-than-temporary impairment occurred for securities held in portfolios managed by a third party, for example, a nuclear decommissioning trust. Those respondents asked whether the proposed FSP would allow a sponsor of a nuclear decommissioning trust to look through to the third-party investment manager s investment strategies in determining whether or not it is more likely than not that it will sell (or will be required to sell) a security prior to recovery. PRESENTATION 10. The majority of preparer respondents stated that only the credit portion of an other-thantemporary impairment, not the gross amount, should be presented on the face of the income statement. Those respondents believe that gross presentation of an other-than-temporary impairment would not contribute to the usefulness of the financial statements and would only serve to confuse users. Those respondents further commented that the gross amount of an otherthan-temporary impairment would be more appropriately disclosed in footnotes to the financial statements. 11. Many respondents favored separately presenting the total other-than-temporary impairment and the amount recognized in other comprehensive income on the face of the statement of earnings. PricewaterhouseCoopers (CL #251) observed that because FSP FAS 115-a would require both credit-related and non-credit-related impairment components to be shown on the face of the income statement (with a corresponding adjustment for the amount 4

5 recognized in other comprehensive income), investors and other financial statement users would have more information about the underlying drivers of impairment charges than they do today. HELD-TO-MATURITY DEBT SECURITIES 12. The majority of preparer respondents, as well as some other respondents, disagreed with the requirement in the proposed FSP to include the noncredit portion of an other-than-temporary impairment of a held-to-maturity debt security in other comprehensive income. Those respondents indicated that recording market losses on held-to-maturity debt securities is inconsistent with the notion that such investments are being held to maturity and will not be subject to any market-related losses. Those respondents were concerned that such a requirement would confuse readers of the financial statements and add unnecessarily complicated operational procedures for preparers by requiring that the noncredit component be accreted back to the value of the security over the remaining life of the security. Respondents that did not agree with the treatment of held-to-maturity debt securities in the proposed FSP recommended that only credit losses be recognized for held-to-maturity debt securities and that the fair value of those securities be disclosed in the notes to the financial statements. Ernst & Young (CL #257) stated that this approach would avoid the additional effort to record and amortize the non-credit loss component in other comprehensive income, which would not provide meaningful information to financial statement users. Ernst & Young further stated that requirements to disclose the key inputs used to measure the portion of the total impairment that relates to credit, as described in paragraph A3(h), along with a requirement to disclose the fair value of any other-thantemporarily impaired held-to-maturity securities, will provide adequate information about such securities. 13. Some respondents were in favor of the requirement to include the noncredit portion of an other-than-temporary impairment of a held-to-maturity debt security in other comprehensive income and to accrete this amount over the remaining life of the security. Those respondents noted that this treatment would allow an entity to only recognize credit-related losses in earnings, while still providing information about the fair value of the security in the balance sheet. Federal Housing Finance Agency (CL #264) stated that while some view the accretion of non-credit OTTI back into interest income over time as distorting net interest income, the Agency does not share this view. The Agency further observed that this accretion simply recognizes the yield an investor would receive on the security had it been purchased at the fair value on the impairment 5

6 date. BIFURCATION OF OTHER-THAN-TEMPORARY IMPAIRMENT LOSSES 14. The majority of respondents stated that bifurcation of other-than-temporary impairment losses would provide useful information to users of financial statements. Qualcomm (CL #227) observed that bifurcation of impairment into the two components better reflects the underlying economics associated with the impairment of a debt instrument and perpetual preferred securities with debt-like characteristics and PricewarehouseCoopers (CL# 251) stated that the proposed treatment of impairment losses would improve the quality of financial reporting because it aligns more closely the income statement impairment loss measurement and recognition models for instruments that differ in legal form but whose underlying cash flows may be essentially the same (i.e., loans and debt securities), provides more information about the causes of changes in the fair value of debt securities, eliminates liquidity-related and other transitory charges from the determination of net income of entities with a buy and hold investment strategy, and provides a more meaningful current income measure. 15. A number of respondents objected to bifurcation of other-than-temporary impairment losses. Those respondents supported the Alternative View of Messrs. Linsmeier and Siegel, stating that liquidity risk is inextricably intertwined with credit risk, representing the discount associated with the uncertainty of collection. Investor Technical Advisory Committee (ITAC, CL #297) observed that no model or process currently exists for the reliable and consistent orthogonal bifurcation of credit and other risk components. ITAC further stated that these components are necessarily highly correlated, e.g., as credit quality deteriorates, risk premia and spreads will increase, driving up interest rates, but not necessarily in a uniform or predictable pattern. Some respondents also expressed the concern that the proposal would introduce additional complexity to financial statements, as well as additional compliance costs. ESTIMATION OF CREDIT LOSSES 16. The proposed FSP indicates that in determining the amount of the total other-thantemporary impairment related to credit losses, the reporting entity should use its best estimate of the amount of the other-than-temporary impairment that relates to an increase in the credit risk associated with the specific instrument. The FSP refers to FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, and EITF Issue No , Recognition of Interest 6

7 Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, as possible methods for estimating that amount. 17. The majority of preparer respondents indicated that the guidance in the proposed FSP for separating credit losses from noncredit losses is operational. Several respondents indicated that additional clarification of the meaning of credit losses would be helpful. Those respondents suggested that the FSP clarify that the amount recognized for credit losses should be based on an estimate of the actual credit losses rather than an extraction of the portion of the fair value affected by the change in credit risk. One respondent suggested that this clarification could be accomplished by replacing the phrase an increase in the credit risk with credit deterioration. 18. Certain respondents requested additional detailed guidance on determining the portion of an other-than-temporary impairment that relates to credit for specific types of securities, including corporate bonds and securities accounted for in accordance with EITF Issue Several respondents requested that the Board clarify whether an adverse change in cash flows that results from an increase in expected prepayments should be recognized in earnings as a credit loss or in other comprehensive income. 19. Some respondents were concerned that credit losses would represent management s estimate of declines in cash flows and not market participants expectations about future declines in cash flows. SUBSEQUENT ACCOUNTING 20. A number of respondents requested the Board provide additional guidance for subsequently accounting for available-for-sale securities when an other-than-temporary impairment is recognized and only the credit portion of the other-than-temporary impairment is recognized in earnings. One respondent suggested that the Board clarify whether the subsequent accounting guidance in FASB Staff Positions FAS and FAS 124-1, The Meaning of Other- Than-Temporary Impairment and Its Application to Certain Investments and Issue would continue to apply. Another respondent requested that the proposed FSP include detailed examples of the subsequent accounting for debt securities for which an other-than-temporary impairment is recognized. 7

8 DISCLOSURE 21. Some respondents recommended the FSP require separate presentation or disclosure of the noncredit portion of an other-than-temporary impairment recorded in accumulated other comprehensive income. Additionally, some users requested disclosure of methods, inputs, and assumptions used in estimating credit losses. CFA Institute (CL #150) stated that additional impairment-related disclosures are imperative to enable investors to understand the changes in fair value and how those changes are being incorporated into earnings and suggested the following disclosures: a rollforward by detailed class of instruments that identifies the beginning balance of impaired securities, changes in each of the classes of instruments in the beginning balance, and new impaired assets added during the period; a tabular format by asset class showing the cash collected during the period on those assets separately identified by amounts for principal, interest, dividends, late fees, and other; and disaggregation of HTM from AFS and disclosure of unamortized fair value portions of HTM securities. The Institute also stated that investors should be informed of the time period that management envisions it will be necessary to hold these impaired securities until they are expected to recover their value. SCOPE OF THE SHORT-TERM PROJECT 22. A significant number of respondents who supported issuance of the proposed FSP recommended that the Board take this opportunity to make additional changes to the other-thantemporary impairment guidance that are not within the scope of this project. The suggested changes include: a. Modifying the language in paragraph 16 of Statement 115 that indicates that all cash flows be collectable as originally scheduled or estimated by indicating that an insignificant delay or insignificant shortfall in amount of payments does not automatically result in other-than-temporary impairment (similar to paragraph 8 of Statement 114). b. Reconsidering the use of fair value to measure other-than-temporary impairments and instead only requiring that probable credit losses be recognized as an other-thantemporary impairment unless there is an intent to sell or it is more likely than not that the entity will be required to sell prior to recovery (that is, requiring an impairment model similar to the model for loans and not requiring any amounts to be recognized 8

9 in other comprehensive income). Wells Fargo (CL #76) observed that financial services companies have the ability to securitize consumer and commercial loans and may choose to hold loans in the legal form of a loan or, at little additional cost, in the legal form of a security, at the option of the company and, therefore, there should be a single impairment model for financial instruments held for investment. c. Reconsidering the prohibition against reversals of other-than-temporary impairments. The letter from American Bankers Association (CL #31A) stated that excluding recoveries from retained earnings reduces transparency as to the performance of the underlying assets (or the market) and recording them will also allow better net interest margin analysis, as appropriate book values will be up-to-date. d. Eliminating any remaining differences between the other-than-temporary impairment models in Statement 114 and Issue e. Requiring that all financial instruments be recognized at fair value and that all changes in fair value be recognized in earnings. f. Addressing equity securities that have characteristics of debt securities, such as assetbacked securities and perpetual preferred securities, including allowing entities that invest in equity securities that hold asset-backed securities to look through to the underlying debt securities and apply the guidance for debt securities in the proposed FSP g. Giving entities that had not previously elected the fair value option in accordance with FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, the ability to make that election. ISSUE 8: EFFECTIVE DATE AND TRANSITION 23. A number of respondents suggested that the effective date of the proposed FSP be revised to allow entities to apply the FSP to quarters ending December 31, 2008, or earlier periods. Some respondents suggested that the FSP be applied retrospectively or that entities be allowed to record a cumulative effect adjustment for securities owned as of the period of adoption. Those respondents cited inconsistency in the subsequent accounting for securities with other-thantemporary impairments prior to the effective date of the FSP and those with an other-than- 9

10 temporary impairment after the effective date as a reason for retrospective application. For example, the yield on a held-to-maturity security could be significantly different depending on whether an other-than-temporary impairment was recognized on the security before or after the effective date of the FSP. Additionally, those respondents noted that there could be a lack of comparability among entities holding the same security depending on the timing of the recognition of an other-than-temporary impairment. The letter received from Independent Community Bankers of America (ICBA, CL #295)) urged the Board to allow restatement of financial statements or an opportunity to true-up other-than-temporary impairments recorded in prior periods to enable users to more easily compare statements for different periods. One preparer respondent also questioned how it would account for additional credit losses when an other-than-temporary impairment that includes credit and noncredit was recognized prior to the effective date of the FSP and cumulative credit losses after the effective date are less than the amount of the original other-than-temporary impairment recognized in earnings. 24. Other respondents expressed support for prospective transition and expressed concerns with an alternative that would require retrospective transition. Those concerns included whether historical data to support the measurement of credit losses would be available and whether retrospective treatment would have any benefit to users of financial statements. 25. A number of respondents suggested that the effective date of the proposed FSP be revised to be required for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. 26. A number of respondents (nonfinancial industry preparers and users) expressed concern that the short time period between the expected issuance of the FSP and the first-quarter reporting will not allow for effective implementation of the proposed guidance. 10