I appreciate the story "Accounting Rulemakers Ease On Fair Value Standards To Aid Corporates (CU Journal Online, Jan. 7) about the new guidance from the Financial Accounting Standards Board (FASB). I'd like to clarify a few points.
First of all, EITF 99-20 selected a subset of securities subject to FAS 115 for a different impairment test. This subset of securities are those rated "A" or below and include basically mortgage-based securities like MBS and CDO securities.
These securities, if rated higher than "A", are still covered under 115 impairment testing that has included a management assessment element. EITF 99-20 required a "market participant's assessment which would most likely be current fair market value. [FASB's recent] action would basically "regroup" similar securities to the 115 model.
It is very important to note that even FAS 115 requires an assessment of expected "future" cash flows not just current or historical.
It is not simply management's asserted judgment. Estimating future cash flows must consider all available information, reflecting past events and current conditions.
But it also must include estimating the cash flow for the remaining payment term, economic factors that are relevant to collectability such as prepayment speeds, the current financial condition of the issuer, and the value of the underlying collateral.
A perfect example would be a security whose underlying asset is loan that is an interest only payment for an initial period of the term.
What is the probability that the borrower will be able to absorb the increase payment? Recent history tells us that it may not be 100% of them but it might not be 50% either, as a market participant may assert.
I think that FSP 99-20-a is a very welcomed and positive change needed for year-end and it should provide a lot of relief, but not total relief, for holders of these securities. I will continue to discuss with the FASB board members (in my role as an advisor) the overall impairment testing model issues this year.
There is more that we need to do here and we will.
Scott M. Waite
SVP-CFO, Patelco CU
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