FASB Issues Proposals That Would Lessen Impact of Impaired Assets on Financial Statements
The Financial Accounting Standards Board has proposed two significant staff positions that would change the presentation of financial assets under FAS 157 (Fair Value Measurements) and likely improve financial statements. In one of the FSPs, FASB proposes that management could consider the impairment of a financial asset to be “other-than-temporary” if it determines that it does not have the intent to sell the security before recovery of cost basis. Upon making this determination, management need only include in earnings the total impairment related to credit losses. In the other FSP, FASB provides 8 specific factors to determine whether a market is inactive (e.g. little market volume, varying prices, significant liquidity premiums, etc.). If management determines that a market is not active, it must then determine if a quoted price is associated with a distressed transaction which would include a determination of whether there was sufficient time for usual and customary marketing activities and whether multiple bidders exist.
OUR TAKE: This is the beginning of the move to liberalize the mark-to-market regime that many blame for the current financial crisis. These FSPs are especially significant because they would reduce the negative pressure on financial statements.