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FASB acts on mark-to-market OTTI
WASHINGTON (4/3/09)—The Financial Accounting Standards Board (FASB) Thursday adopted rule changes on mark-to-market accounting and on treatment of the "other-than-temporary impairment" (OTTI) of assets. The Credit Union National Association (CUNA) said FASB’s action is generally a positive development on the OTTI changes and will help credit unions and other financial institutions deal with some of the current market issues. However, CUNA added, FASB could have done more. For instance, as FASB indicated in its March 17 proposal, the OTTI changes are not retroactive for 2008 financial statements. The accounting changes do ease somewhat the rules for financial institutions regarding securities that must be treated as OTTI and in that sense are a step forward, according to CUNA. However, the trade group said it was unfortunate the changes will likely have minimal impact on asset-backed securities held by U.S. Central FCU and Western Corporate FCU, the two corporate credit unions recently put into conservatorship by the National Credit Union Administration (NCUA). Because of that, the change may have little bearing on the cost to credit unions of NCUA’s corporate stabilization plans, CUNA noted. Final language hasn’t been released yet, but CUNA said key points based on today’s action include:
* As noted, the changes are not retroactive for 2008 financial statements. CUNA and others urged that changes apply beginning with year-end 2008. The decision may have been FASB’s attempt to find a middle ground between those promoting changes that reflect today’s economic reality and those calling on FASB to resist and preserve the status quo. * Prior to Thursday’s action, financial institutions with securities determined to be OTTI had to record the entire impairment in their earnings, whether it was based on credit, liquidity or other factors. FASB did not change the requirement to record the amount of impairment in earnings based on credit losses. * Impairment losses on debt instruments resulting from other factors, such as liquidity, would be reported as other comprehensive income (OCI) and won’t have to be reflected in earnings. This will be useful for reporting assets where the market is not functioning normally but that still are performing and have positive cash flows. * Whether separation of credit from other losses is permitted depends on the likelihood that the security will be held until it recovers in value; * On fair value, FASB adopted guidance for determining whether or not a market is active and whether or not a transaction is distressed—two key factors in applying fair value standards. However, CUNA believes there is still room for substantial improvement here and will continue to press this point with FASB.
Under FASB’s action, compliance is mandatory after June 15, 2009. Early adoption is allowed for periods ending after March 15, 2009. Final changes should be out the second week of April.


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