FASB-Fncl Acctg Stds Board changed rules-reporting of Marked to Mkt losses. We were given only 14 da

oreville

The following are the new releases. A little bit dry. But very very scary.

NEWS RELEASE 03/17/09
FASB Issues Proposals to Improve Guidance on Fair Value Measurements and Impairments

Norwalk, CT, March 17, 2009—The FASB today issued two proposed staff positions (FSPs) intended to provide additional application guidance regarding fair value measurements and impairments of securities. Proposed FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, provides guidelines for making fair value measurements more consistent with the principles presented in FASB Statement No. 157, Fair Value Measurements. Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

Statement 157 provides a framework for measuring fair value and a definition of fair value that contemplates an orderly transaction between market participants, not a forced or distressed sale. In the current economic crisis, many constituents have requested additional authoritative guidance to assist them in determining whether a market is active or inactive, and whether a transaction is distressed. Proposed FSP FAS 157-e would provide this application guidance.

Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b on other-than-temporary impairments (OTTI) is intended to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to more effectively communicate when an OTTI event has occurred. As proposed, the FSP would apply to both debt and equity securities. The proposed FSP requires separate display of losses related to credit deterioration and losses related to other market factors on the income statement. Market-related losses would be recorded in other comprehensive income if it is not likely that the investor will have to sell the security prior to recovery.

If approved, both FSPs would be effective for interim and annual periods ending after March 15, 2009. Constituents are encouraged to review the proposed FSPs and provide comment on whether they agree that the proposed FSPs would improve financial reporting. Written comments on both FSPs are due by Wednesday, April 1, 2009. The proposed FSPs and instructions for submitting comments can be found at www.fasb.org. The FASB has scheduled a Board meeting on April 2, 2009, to evaluate all comment letters and other input received on the FSPs.

Beyond these near-term proposed improvements, the FASB has a joint project with the International Accounting Standards Board aimed at more broadly revamping and converging their respective standards on accounting for financial instruments.

About the Financial Accounting Standards Board

Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information. For more information about the FASB, visit our website at www.fasb.org.

oreville

Unfortunately, the deadline for commentary and concerns addressed to the FASB has passed as of 4/1/09. Just when most CPA's are too busy to think about it!

Extra long, Sorry.

Notice for Recipients
of This Proposed FASB Staff Position
This proposed FASB Staff Position (FSP) provides additional guidance on
determining whether a market for a financial asset is not active and a transaction is not
distressed for fair value measurements under FASB Statement No. 157, Fair Value
Measurements.
The Board invites individuals and organizations to send written comments on all
matters in this proposed FSP. Respondents need not comment on all of the issues
presented and are encouraged to comment on additional issues as well. Comments are
requested from those who agree with the provisions of this proposed FSP as well as from
those who do not. Comments are most helpful if they identify the issues to which they
relate and clearly explain the reasons for the positions taken. Those who disagree with
provisions of this proposed FSP are asked to describe their suggested alternatives,
supported by specific reasoning.
The Board requests that constituents provide comments on the following
questions:
1. Is the proposed effective date of interim and annual periods ending after March
15, 2009, operational?
2. Will this proposed FSP meet the project’s objective to improve financial reporting
by addressing fair value measurement application issues identified by constituents
related to determining whether a market is not active and a transaction is not
distressed? Do you believe the amendments to Statement 157 in this proposed
FSP are necessary, or do you believe the current requirements in Statement 157
should be retained?
3. Do you believe the proposed two-step model for determining whether a market is
not active and a transaction is not distressed is understandable and operational? If
not, please suggest alternative ways of identifying inactive markets and distressed
transactions.
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e)
4. Are the factors listed in paragraph 11 of the FSP that indicate that a market is not
active appropriate? Please provide any other factors that indicate that a market is
not active.
5. What costs do you expect to incur if the Board were to issue this proposed FSP in
its current form as a final FSP? How could the Board further reduce the costs of
applying the requirements of the FSP without reducing the benefits?
Responses must be received in writing by April 1, 2009. Earlier responses are
encouraged. Interested parties should submit their comments by email to
director@fasb.org, File Reference: Proposed FSP FAS 157-e. Those without email may
send their comments to “Technical Director, FASB, 401 Merritt 7, PO Box 5116,
Norwalk, CT 06856-5116, File Reference: Proposed FSP FAS 157-e.” Responses should
not be sent by fax. All comments received by the FASB are considered public
information. Those comments will be posted to the FASB website and included as part of
the project record with other project materials.
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 1



PROPOSED FASB STAFF POSITION
No. FAS 157-e
Title: Determining Whether a Market Is Not Active and a Transaction Is Not Distressed
Date Released: March 17, 2009
Comment Deadline: April 1, 2009
Objective
1. This proposed FASB Staff Position (FSP) provides additional guidance on
determining whether a market for a financial asset is not active and a transaction is not
distressed for fair value measurements under FASB Statement No. 157, Fair Value
Measurements.
Background
2. Statement 157 was issued in September 2006 and is effective for financial assets and
financial liabilities for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Early application was
encouraged.
3. Statement 157 establishes a single definition of fair value and a framework for
measuring fair value in generally accepted accounting principles (GAAP) that result in
increased consistency and comparability in fair value measurements. Statement 157 also
expands disclosures about fair value measurements, thereby improving the quality of
information provided to users of financial statements. Statement 157 does not require any
new fair value measurements.
4. The FASB obtained extensive input from various constituents, including financial
statement users, preparers, and auditors, on determining fair value in accordance with
Statement 157. Many of those constituents indicated that the fair value measurement
framework in Statement 157 and related disclosures have improved the quality and
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 2



transparency of financial information. However, certain constituents have requested
additional authoritative guidance related to the application of Statement 157.
5. Paragraph 7 of Statement 157 states, “A fair value measurement assumes that the
asset or liability is exchanged in an orderly transaction between market participants to
sell the asset or transfer the liability at the measurement date. An orderly transaction is a
transaction that assumes exposure to the market for a period prior to the measurement
date to allow for marketing activities that are usual and customary for transactions
involving such assets or liabilities; it is not a forced transaction (for example, a forced
liquidation or distress sale).” (emphasis added) The notion that a price for a forced
liquidation or distress sale does not represent fair value is also discussed in paragraphs 10
and 17 of Statement 157.
6. Many constituents believe that Statement 157 and FSP FAS 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active, do not
provide sufficient guidance on how to determine whether a market for a financial asset
that historically was active is not active and whether a transaction is not distressed. Also,
those constituents state that the fair value hierarchy within Statement 157 may be
interpreted to emphasize the use of an observable market transaction even when that
transaction may be distressed or the market for that transaction may not be active.
Constituents have indicated that this emphasis on the use of the so-called last transaction
price as the sole or primary basis of fair value even when a significant adjustment may be
required to the transaction price or when other valuation techniques should be considered
has resulted in a misapplication of Statement 157 when estimating the fair value of
certain financial assets.
7. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was signed
into law. Section 133 of the Act mandated that the Securities and Exchange Commission
(SEC) conduct a study on mark-to-market accounting standards. The SEC provided its
study, Report and Recommendations Pursuant to Section 133 of the Emergency
Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting, to the United
States Congress on December 30, 2008. One of the recommendations in the study stated
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 3



that “additional measures should be taken to improve the application and practice related
to existing fair value requirements (particularly as they relate to both Level 2 and Level 3
estimates).” This recommendation further notes that “fair value requirements should be
improved through development of application and best practices guidance for
determining fair value in illiquid or inactive markets.” The SEC’s suggestions for
additional guidance included (a) how to determine when markets become inactive and (b)
how to determine if a transaction or group of transactions is forced or distressed. The
guidance included in this FSP addresses the recommendations specific to these issues in
the SEC’s study on mark-to-market accounting.
All paragraphs in this FSP have equal authority.
Paragraphs in bold set out the main principles.
FASB Staff Position
Scope
8. This FSP applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with
Statement 157.
Guidance on Determining Whether a Market Is Not Active and a Transaction
Is Not Distressed
9. This FSP provides additional guidance on determining whether a market for a
financial asset is not active and a transaction is not distressed for fair value measurements
under Statement 157.
10. This FSP establishes a two-step process to determine whether a market is not
active and a transaction is not distressed.
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 4



11. Step 1 provides factors that indicate that a market is not active. Those factors should
not be considered all inclusive because other factors may also indicate that a market is
not active. Factors include:
a. Few recent transactions (based on volume and level of activity in the market).
Thus, there is not sufficient frequency and volume to provide pricing
information on an ongoing basis.
b. Price quotations are not based on current information.
c. Price quotations vary substantially either over time or among market makers
(for example, some brokered markets).
d. Indexes that previously were highly correlated with the fair values of the asset
are demonstrably uncorrelated with recent fair values.
e. Abnormal (or significant increases in) liquidity risk premiums or implied yields
for quoted prices when compared with reasonable estimates (using realistic
assumptions) of credit and other nonperformance risk for the asset class.
f. Abnormally wide bid-ask spread or significant increases in the bid-ask spread.
g. Little information is released publicly (for example, a principal-to-principal
market).
12. After evaluating all factors and considering the significance and relevance of each
factor, the reporting entity shall use its judgment in determining whether the market is
active.
13. If the reporting entity concludes in step 1 that the market for the asset is not active,
then the reporting entity will proceed to step 2. In step 2, the reporting entity must
presume that a quoted price is associated with a distressed transaction unless the
reporting entity has evidence that (a) there was sufficient time before the measurement
date to allow for usual and customary marketing activities for the asset and (b) there were
multiple bidders for the asset.
14. If the reporting entity has evidence that both factors are present for a given quoted
price, then that quoted price is presumed not to be associated with a distressed
transaction. In that case, the quoted price may be a relevant observable input that should
be considered in estimating fair value. However, the reporting entity should consider
whether any other factors or conditions warrant making an adjustment to the quoted price
as discussed in paragraph 29 of Statement 157. For example, if a quoted price that is not
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 5



associated with a distressed transaction is not current or is a consequence of a trade with
an insignificant volume relative to the total market for that asset, the reporting entity
should consider whether that quoted price is a relevant observable input (that is, whether
the quoted price requires adjustment).
15. If the reporting entity does not have evidence that both factors in paragraph 13 are
present for a given quoted price, then the reporting entity shall consider that quoted price
to be associated with a distressed transaction. When that is the case, the reporting entity
must use a valuation technique other than one that uses that quoted price without
significant adjustment. For example, the reporting entity could use an income approach,
such as a present value technique to estimate fair value. The inputs to the present value
technique should reflect an orderly transaction between market participants at the
measurement date. An orderly transaction would reflect all risks inherent in the asset,
including a reasonable risk premium for bearing uncertainty that would be considered by
willing buyers and willing sellers in pricing the asset in a nondistressed transaction at the
measurement date.
Effective Date and Transition
16. This FSP shall be effective for interim and annual periods ending after March 15,
2009, and shall be applied prospectively. Retrospective application to a prior interim or
annual reporting period is not permitted.
17. Revisions resulting from a change in the valuation technique or its application shall
be accounted for as a change in accounting estimate (FASB Statement No. 154,
Accounting Changes and Error Corrections, paragraph 19). In the period of adoption,
entities shall disclose a change in valuation technique resulting from the application of
this FSP, and quantify its effects, if practicable.
The provisions of this FSP need not be applied to immaterial items.
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 6



Appendix
AMENDMENTS TO STATEMENT 157 AND FSP FAS 157-3
A1. Statement 157 is amended as follows: [Added text is underlined and deleted
text is struck out.]
a. Paragraph 21:
In this Statement, inputs refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including
assumptions about risk, for example, the risk inherent in a particular
valuation technique used to measure fair value (such as a pricing
model) and/or the risk inherent in the inputs to the valuation technique.
Inputs may be observable or unobservable:
a. Observable inputs are inputs that reflect the assumptions
market participants would use in pricing the asset or liability
developed based on relevant market data obtained from
sources independent of the reporting entity.
b. Unobservable inputs are inputs that reflect the reporting
entity's own assumptions about the assumptions market
participants would use in pricing the asset or liability
developed based on the best information available in the
circumstances.
Valuation techniques used to measure fair value shall maximize the use
of relevant observable inputs (that is, Level 1 and Level 2 inputs that do
not require significant adjustment) and minimize the use of
unobservable inputs.
b. Paragraph 28:
Level 2 inputs are inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly or
indirectly. If the asset or liability has a specified (contractual) term, a
Level 2 input must be observable for substantially the full term of the
asset or liability. Level 2 inputs include the following:
a. Quoted prices for similar assets or liabilities in active markets
b. Quoted prices for identical or similar assets or liabilities in
markets that are not active (paragraph 29A includes example
factors that may indicate a market is not active), that is,
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 7



markets in which there are few transactions for the asset or
liability, the prices are not current, or price quotations vary
substantially either over time or among market makers (for
example, some brokered markets), or in which little
information is released publicly (for example, a principal-toprincipal
market)
c. Inputs other than quoted prices that are observable for the
asset or liability (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates)
d. Inputs that are derived principally from or corroborated by
observable market data by correlation or other means (marketcorroborated
inputs).
c. Paragraph 29A is added as follows:
When evaluating whether it is necessary to make a significant
adjustment to quoted prices for identical or similar assets or liabilities
in markets that are not active, the reporting entity shall apply the
following two-step approach (significant judgment is required):
Step 1: Determine whether there are factors present that indicate that
the market for the asset is not active at the measurement date. Those
factors should not be considered all inclusive because other factors may
also indicate that a market is not active. Factors include:
a. Few recent transactions (based on volume and level of activity
in the market). Thus, there is not sufficient frequency and
volume to provide pricing information on an ongoing basis.
b. Price quotations are not based on current information.
c. Price quotations vary substantially either over time or among
market makers (for example, some brokered markets).
d. Indexes that previously were highly correlated with the fair
values of the asset are demonstrably uncorrelated with recent
fair values.
e. Abnormal (or significant increases in) liquidity risk premiums
or implied yields for quoted prices when compared with
reasonable estimates (using realistic assumptions) of credit
and other nonperformance risk for the asset class.
f. Abnormally wide bid-ask spread or significant increases in the
bid-ask spread.
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 8



g. Little information is released publicly (for example, a
principal-to-principal market).
After evaluating all factors and considering the significance and
relevance of each factor, the reporting entity shall use its judgment in
determining whether the market is active. The reporting entity shall
apply step 2 when the entity determines that the market is not active.
Step 2: Evaluate the quoted price (that is, a recent transaction or
broker price quotation) to determine whether the quoted price is
associated with a distressed transaction. The reporting entity shall
presume that the quoted price is associated with a distressed transaction
unless the reporting entity has evidence that indicates that both of the
following factors are present for a given quoted price:
a. There was a period before the measurement date to allow for
marketing activities that are usual and customary for
transactions involving such assets or liabilities (for example,
there was not a regulatory requirement to sell).
b. There were multiple bidders for the asset.
If the reporting entity has evidence that both factors are present for a
given quoted price, then that quoted price is presumed not to be
associated with a distressed transaction. In that case, the quoted price
may be a relevant observable input that shall be considered in
estimating fair value. However, the reporting entity should consider
whether any other factors or conditions warrant making an adjustment
to the quoted price (see paragraph 29). For example, if a quoted price
that is not associated with a distressed transaction is not current or is a
consequence of a trade with an insignificant volume relative to the total
market for that asset, the reporting entity should consider whether that
quoted price is a relevant observable input (that is, whether the quoted
price requires adjustment).
If the reporting entity does not have evidence that both factors are
present for a given quoted price (including because there is insufficient
information on which to base a conclusion), then the reporting entity
shall consider the quoted price to be associated with a distressed
transaction and shall use a valuation technique other than one that uses
the quoted price without significant adjustment (that is, a significant
adjustment is required, resulting in a Level 3 measurement). For
example, the reporting entity could use an income approach (that is, a
present value technique) to estimate fair value. However, the fair value
resulting from the present value technique shall not be derived solely
from inputs based on the quoted price associated with a distressed
transaction. The inputs should be reflective of an orderly (that is, not
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 9



distressed or forced) transaction between market participants at the
measurement date. An orderly transaction would reflect all risks
inherent in the asset, including a reasonable risk premium for bearing
uncertainty that would be considered by market participants (that is,
willing buyers and willing sellers) in pricing the asset in a nondistressed
transaction.
d. Paragraph 30:
Level 3 inputs are unobservable inputs for the asset or liability.
Unobservable inputs shall be used to measure fair value to the extent
that relevant observable inputs are not available, thereby allowing for
situations in which there is little, if any, market activity for the asset or
liability at the measurement date. However, the fair value measurement
objective remains the same, that is, an exit price from the perspective of
a market participant that holds the asset or owes the liability. Therefore,
unobservable inputs shall reflect the reporting entity’s own assumptions
about the assumptions that market participants would use in pricing the
asset or liability (including assumptions about risk). Unobservable
inputs shall be developed based on the best information available in the
circumstances, which might include the reporting entity’s own data. In
developing unobservable inputs, the reporting entity need not undertake
all possible efforts to obtain information about market participant
assumptions. However, the reporting entity shall not ignore information
about market participant assumptions that is reasonably available
without undue cost and effort. Therefore, the reporting entity’s own
data used to develop unobservable inputs shall be adjusted if
information is reasonably available without undue cost and effort that
indicates that market participants would use different assumptions.
e. Paragraph A20:
This Statement emphasizes that valuation techniques used to measure
the fair value of an asset or liability should maximize the use of
relevant observable inputs, that is, inputs that reflect the assumptions
market participants would use in pricing the asset or liability developed
based on relevant market data obtained from sources independent of the
reporting entity. Examples of markets in which inputs might be
observable for some assets and liabilities (for example, financial
instruments) include the following:
f. Paragraphs A32A–A32F and related heading and footnotes are replaced with
paragraphs A32A–A32G and their related heading and footnotes:
Example 11—Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 10



Example 11—Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active
Note: The conclusions reached in this example are based on the
assumed facts and circumstances presented. Other approaches to
determining fair value may be appropriate. Also, this example assumes
that the observable transactions considered in determining fair value
were not forced liquidations or distressed transactions.
A32A. On January 1, 20X8, Entity A invested in a AA-rated
tranche of a collateralized debt obligation security. The underlying
collateral for the collateralized debt obligation security is unguaranteed
nonconforming residential mortgage loans. Prior to June 30, 20X8,
Entity A was able to determine the fair value of the collateralized debt
obligation security using a market approach valuation technique based
on Level 2 inputs that did not require significant adjustment. The Level
2 inputs included:
a. Quoted prices in active markets for similar collateralized debt
obligation securities with insignificant adjustments for
differences between the collateralized debt obligation security
that Entity A holds and the similar collateralized debt
obligation securities
b. Quoted prices in markets that are not active that represent
current transactions for the same or similar collateralized debt
obligation securities that do not require significant adjustment
based on unobservable inputs.
A32B. Since June 30, 20X8, the market for collateralized debt
obligation securities has become increasingly inactive. The inactivity
was evidenced first by a significant widening of the bid-ask spread in
the brokered markets in which collateralized debt obligation securities
trade and then by a significant decrease in the volume of trades relative
to historical levels as well as other relevant factors. At September 30,
20X8 (the measurement date), Entity A determines that the market for
its collateralized debt obligation security is not active and that markets
for similar collateralized debt obligation securities (such as higher-rated
tranches within the same collateralized debt obligation security vehicle)
also are not active. That determination was made considering that there
are few observable transactions for the collateralized debt obligation
security or similar collateralized debt obligation securities, the prices
for those transactions that have occurred are not current, and the
observable prices for those transactions vary substantially either over
time or among market makers, thus reducing the potential relevance of
those observations. Consequently, while Entity A appropriately
considers those observable inputs, ultimately, Entity A’s collateralized
debt obligation security will be classified within Level 3 of the fair
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 11



value hierarchy because Entity A determines that significant
adjustments using unobservable inputs are required to determine fair
value at the measurement date.
A32C. Entity A determines that an income approach valuation
technique (present value technique) that maximizes the use of relevant
observable inputs and minimizes the use of unobservable inputs will be
equally or more representative of fair value than the market approach
valuation technique used at prior measurement dates, which would now
require significant adjustments.21a Specifically, Entity A uses the
discount rate adjustment technique described in Appendix B of
Statement 157 to determine fair value.
A32D. Entity A determines that the appropriate discount rate21b
used to discount the contractual cash flows21c of its collateralized debt
obligation security is 22 percent after considering the following:
a. The implied rate of return at the last date on which the market
was considered active for the collateralized debt obligation
security was 15 percent. Based on an analysis of available
observable inputs for mortgage-related debt securities, Entity A
determines that market rates of return generally have increased
in the marketplace since the last date on which the market was
considered active for the collateralized debt obligation security.
Entity A estimates that credit spreads have widened by
approximately 100 basis points and liquidity risk premiums
have increased during that period by approximately 400 basis
points. Other risks (for example, interest rate risk) have not
changed. Using this information, Entity A estimates that an
indication of an appropriate rate of return for the collateralized
debt obligation security is 20 percent.21d In making that
determination, Entity A considered all available market
information that could be obtained without undue cost and
effort. For this collateralized debt obligation security, the
available market information used in assessing the risks in the
security (including nonperformance risk [for example, default
risk and collateral value risk] and liquidity risk) included:
(1) Quoted prices that are not current for the same or similar
collateralized debt obligation securities
(2) Relevant reports issued by analysts and ratings agencies
(3) The current level of interest rates and any directional
movements in relevant indexes, such as credit risk indexes
(4) Information about the performance of the underlying
mortgage loans, such as delinquency and foreclosure rates,
loss experience, and prepayment rates
(5) Other relevant observable inputs.
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 12



b. Two indicative quotes (that is, nonbinding quotes) for the
collateralized debt obligation security from brokers imply a
rate of return of 23 percent and 27 percent. The indicative
quotes are based on proprietary pricing models utilizing
significant unobservable inputs (that is, Level 3 inputs), rather
than actual transactions.
A32E. Because Entity A has multiple indications of the
appropriate rate of return that market participants would consider
relevant in estimating fair value, it evaluates and weighs, as
appropriate, the respective indications of the appropriate rate of return,
considering the reasonableness of the range indicated by the results.
Entity A concludes that 22 percent is the point within the range of
relevant inputs that is most representative of fair value in the
circumstances. Entity A placed more weight on the 20 percent
estimated rate of return (that is, its own estimate) because (a) the
indications of an appropriate rate of return provided by the broker
quotes were nonbinding quotes based on the brokers’ own models using
significant unobservable inputs, and (b) Entity A was able to
corroborate some of the inputs, such as default rates, with relevant
observable market data, which it used to make significant adjustments
to the implied rate of return when the market was last considered active.
A32F. In accordance with the requirements of Statement 157,
Entity A determines that the risk-adjusted discount rate appropriately
reflects the reporting entity’s estimate of the assumptions that market
participants would use to estimate the selling price of the asset at the
measurement date. Risks incorporated in the discount rate include
nonperformance risk (for example, default risk and collateral value
risk) and liquidity risk (that is, the compensation that a market
participant receives for buying an asset that is difficult to sell under
current market conditions).
____________
21a See paragraphs 20 and 21 of Statement 157.
21b See paragraphs B7–B11 of Statement 157.
21c The discount rate adjustment technique described in paragraphs B7–B11 of
Statement 157 would not be appropriate when determining whether the change in fair
value results in an impairment and/or necessitates a change in yield under EITF Issue
No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,"
because that technique uses contractual cash flows rather than cash flows expected by
market participants.
21d Calculated as the 15 percent implied rate of return at the last date on which the
market was considered active, plus the increase in (a) credit spreads of 100 basis
points (1 percent) and (b) liquidity risk premiums of 400 basis points (4 percent).
Example 11—Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 13



Note: The conclusions reached in this example are based on the
assumed facts and circumstances presented. Other approaches to
determining fair value may be appropriate.
A32A. On January 1, 20X8, Entity A invested in a AAA-rated
tranche of a collateralized debt obligation security. The underlying
collateral for the collateralized debt obligation security is unguaranteed
nonconforming residential mortgage loans. At March 31, 20X9 (the
measurement date) the collateralized debt obligation security is now Arated.
Entity A believes that the market for its collateralized debt
obligation security is not active and that markets for similar
collateralized debt obligation securities also are not active.
A32B. Entity A considers the guidance in paragraph 29A to
determine whether the market for the collateralized debt obligation
security is not active. After evaluating the factors and considering the
significance and relevance of each factor, Entity A concludes that the
evidence indicates that the market for the collateralized debt obligation
security is not active at the measurement date. That determination was
made considering that there are few observable transactions for the
collateralized debt obligation security or similar collateralized debt
obligation securities, the quoted prices for those transactions that have
occurred are not current, and those quoted prices indicate abnormal
liquidity risk premiums when compared with reasonable estimates of
credit risk for collateralized debt obligation securities, thus reducing the
potential relevance of those observations.
A32C. Based on the guidance in paragraph 29A, Entity A next
evaluates the quoted prices to determine whether those transactions are
not distressed. Entity A concludes that it does not have evidence that
indicates that the observable transactions are not distressed (that is,
there was not evidence that indicates that there was sufficient time to
market the collateralized debt obligation security and that there were
multiple bidders for the collateralized debt obligation security).
Because Entity A did not have sufficient information on which to
conclude that the quoted prices are not distressed, Entity A concludes
that the quoted prices can not be used as inputs to a fair value
measurement without making a significant adjustment.
A32D. Entity A uses the discount rate adjustment technique
described in Appendix B this Statement to determine fair value for its
collateralized debt obligation security at the measurement date.21a Entity
A uses an estimate of the most likely cash flows from the collateralized
debt obligation security, which were determined on the basis of a model
that uses realistic assumptions (considering all available market
information discussed below) about the performance of the underlying
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 14



mortgage loans. 21b The cash flows represent the most likely outcome
from the range of all possible outcomes (that is, it is not the best case
scenario and it is not the worst case scenario).
A32E. Entity A then estimates a discount rate to be applied to the
cash flows (that is, a range of possible market rates of return). An
appropriate market rate of return considers the risks inherent in the
collateralized debt obligation security, including reasonable risk
premiums for uncertainty. Entity A considers inputs that market
participants would consider in estimating a rate of return in an orderly
transaction. For this collateralized debt obligation security, the
available information used to estimate an appropriate rate of return
included:
(1) Risk-free rate based on the rate of return on government debt
securities
(2) Credit spreads for current issuances for similarly rated
securities
(3) Reasonable assumptions regarding liquidity and
nonperformance (for example, default risk and collateral value
risk) risks that willing buyers and willing sellers would
consider in pricing the asset in an orderly transaction based on
current market conditions
(4) Relevant reports issued by analysts and ratings agencies
(5) Information about the performance of the underlying mortgage
loans, such as delinquency and foreclosure rates, loss
experience, and prepayment rates
A32F. Entity A estimates a range of possible rates of return from 7
percent (based on an estimated rate of return for the collateralized debt
obligation in a hypothetical active market at the measurement date) to
15 percent (based on bid-level yields implied by the difference between
the contractual cash flow amount and the most likely cash flow estimate
adjusted for a reasonable risk premium due to uncertainty). Because 7
percent is not a rate that willing buyers would accept and 15 percent is
not a rate that willing sellers would accept, Entity A uses the midpoint
or 11 percent (see paragraph 31).
A32G. Because changing the selected discount rate would change
the fair value for the collateralized debt obligation security
significantly, Entity A voluntarily discloses that input and the effect of
using other reasonably possible discount rate estimates.
____________
21a See paragraphs 20 and 21 of Statement 157.
21b The discount rate adjustment technique described in paragraphs B7–B11 of
Statement 157 would not be appropriate when determining whether there has been an
other-than-temporary impairment and/or a change in yield under EITF Issue No. 99-
20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 15



and Beneficial Interests That Continue to Be Held by a Transferor in Securitized
Financial Assets," when that technique uses contractual cash flows rather than most
likely cash flows.
A2. FSP FAS 157-3 is amended as follows:
a. Paragraph 9:
Key existing principles of Statement 157 illustrated in the example
include:
a. A fair value measurement represents the price at which a
transaction would occur between market participants at the
measurement date. As discussed in Statement 157, in
situations in which there is little, if any, market activity for an
asset at the measurement date, the fair value measurement
objective remains the same, that is, the price that would be
received by the holder of the financial asset in an orderly
transaction (an exit price notion) that is not a forced
liquidation or distressed sale at the measurement date.1 Even
in times of market illiquidity dislocation, it is not appropriate
to conclude that all market activity represents forced
liquidations or distressed sales. However, it is also not
appropriate to automatically conclude that any transaction
price is determinative of fair value. Determining fair value in
an inactive dislocated market depends on the facts and
circumstances and may require the use of significant
judgment. Paragraph 29A of Statement 157 provides a twostep
process in this circumstance. about whether individual
transactions are forced liquidations or distressed sales.
b. In determining fair value for a financial asset, the use of a
reporting entity’s own assumptions about future cash flows
and appropriately risk-adjusted discount rates is acceptable
when relevant observable inputs are not available. Statement
157 discusses a range of information and valuation techniques
that a reporting entity might use to estimate fair value when
relevant observable inputs are not available.2 In some cases an
entity may determine that observable inputs (Level 2) require
significant adjustment based on unobservable data and thus
would be considered a Level 3 fair value measurement. For
example, in cases where the volume and level of trading
activity in the asset have declined significantly, the available
prices vary significantly over time or among market
participants, or the prices are not current, the observable
FSP FAS 157-e
Proposed FSP on Statement 157 (FSP FAS 157-e) 16

oreville

FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b)
Notice for Recipients of
This Proposed FASB Staff Position
This proposed FASB Staff Position (FSP) would amend FASB Statements No. 115,
Accounting for Certain Investments in Debt and Equity Securities, No. 124, Accounting for
Certain Investments Held by Not-for-Profit Organizations, and EITF Issue No. 99-20,
“Recognition of Interest Income and Impairment on Purchased Beneficial Interests and
Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,”
to make the other-than-temporary impairment guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements. This proposed
FSP would modify the current indicator that, to avoid considering an impairment to be otherthan-
temporary, management must assert it has both the intent and the ability to hold an impaired
security for a period of time sufficient to allow for any anticipated recovery in fair value.
Instead, management would be required to 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. This proposed FSP would change the total amount recognized in earnings (or
the “performance indicator” of not-for-profit entities within the scope of the AICPA Audit and
Accounting Guide, Health Care Organizations) when there are credit losses associated with an
impaired debt security for which management asserts that it does not have the intent to sell the
security and it is more likely than not that it will not have to sell the security before recovery of
its cost basis. In those situations, the impairment would be separated into (a) the amount of the
total impairment related to credit losses and (b) the amount of the total impairment related to all
other factors. The amount of the total impairment related to credit losses would be included in
earnings (or the “performance indicator”). The amount of the total impairment related to all
other factors would be included in other comprehensive income (or would be excluded from the
“performance indicator”). A reporting entity would be required to present separately the total
amount of the impairment in the statement of earnings (or the “performance indicator”) and the
amount recognized in other comprehensive income (or outside the “performance indicator”) as a
deduction from the total impairment.
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b)
The Board invites individuals and organizations to send written comments on all matters
in this proposed FSP, particularly on the questions listed below. Respondents need not comment
on each issue and are encouraged to comment on additional matters that they believe should be
brought to the Board’s attention. Comments are requested from those who agree with the
provisions of this proposed FSP as well as from those who do not. Comments are most helpful if
they identify the issues or the specific paragraph(s) to which they relate and clearly explain the
reasons for the positions taken. Those who disagree with provisions of this proposed FSP are
asked to describe their suggested alternatives, supported by specific reasoning.
The Board requests that constituents provide comments on the following questions:
1. This proposed FSP would require entities to separate (and present separately on the
statement of earnings or “performance indicator”) an other-than-temporary
impairment of a debt security into two components when there are credit losses
associated with an impaired debt security for which management asserts that it does
not have the intent to sell the security and it is more likely than not that it will not
have to sell the security before recovery of its cost basis. The two components would
be (a) the credit component and (b) the noncredit component (residual related to other
factors). Does this separate presentation provide decision-useful information?
2. This proposed FSP would require that the credit component of the other-thantemporary
impairment of a debt security be determined by the reporting entity using
its best estimate of the amount of the impairment that relates to an increase in the
credit risk associated with the specific instrument. One way of estimating that amount
would be to consider the measurement methodology described in paragraphs 12–16
of FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan. For
debt securities that are beneficial interests in securitized financial assets within the
scope of Issue 99-20, the amount of the total impairment related to credit losses
would be determined considering the guidance in paragraph 12(b) of Issue 99-20. Do
you believe this guidance is clear and operational? Do you agree with the
requirement to recognize the credit component of an other-than-temporary
impairment in income and the remaining portion in other comprehensive income?
Under what circumstances should the remaining portion be recognized in earnings?
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b)
3. This proposed FSP modifies the current indicator that, to avoid considering an
impairment to be other than temporary, management must assert that it has both the
intent and the ability to hold an impaired security for a period of time sufficient to
allow for any anticipated recovery in fair value. The Board believes that, compared
to current requirements, it is more operational for management to 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 its recovery. Does this modification make this
aspect of the other-than-temporary impairment assessment more operational (the
remaining factors discussed in FSP FAS 115-1/FAS 124-1, The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments, would
remain unchanged)? Should this modification apply to both debt and equity
securities? Will this change result in a significant change to the assessment of
whether an equity security is other-than-temporarily impaired?
4. This proposed FSP would require that the portion of an impairment recognized in
other comprehensive income for held-to-maturity securities be amortized (through
other comprehensive income) over the remaining life of the debt security in a
prospective manner based on the amount and timing of future estimated cash flows by
offsetting the recorded value of the asset (that is, an entity would not be permitted to
adjust the fair value of a held-to-maturity security for subsequent recoveries in the
fair value of the security similar to the accounting for available-for-sale securities).
Do you agree with this requirement?
5. Is the proposed effective date of interim and annual periods after March 15, 2009,
operational?
Responses must be received in writing by April 1, 2009. Earlier responses are
encouraged. Interested parties should submit their comments by email to director@fasb.org, File
Reference: Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b. Those without email may
send their comments to “Technical Director, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT
06856-5116, File Reference: Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b.”
Responses should not be sent via facsimile.
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b)
All comments received by the FASB are considered public information. Those
comments will be posted to the FASB’s website and included as part of the public record with
other project materials.
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 1



PROPOSED FASB STAFF POSITION
No. FAS 115-a, FAS 124-a, and EITF 99-20-b
Title: Recognition and Presentation of Other-Than-Temporary Impairments
Date Released: March 17, 2009
Comment Deadline: April 1, 2009
Objective
1. The objective of an other-than-temporary impairment analysis under existing U.S.
generally accepted accounting principles (GAAP) is to determine whether the holder is likely to
realize some portion of the unrealized loss on an impaired security. An investment is impaired
if the fair value of the investment is less than its cost.1
2. This FASB Staff Position (FSP) amends the other-than-temporary impairment guidance
in U.S. GAAP to make the guidance more operational and to improve the presentation otherthan-
temporary impairments in the financial statements. This FSP modifies the current
indicator that, to avoid considering an impairment to be other than temporary, management
must assert it has both the intent and the ability to hold an impaired security for a period of time
sufficient to allow for any anticipated recovery in fair value. The Board believes it is more
operational for management to 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 its recovery. This
FSP changes the total amount recognized in earnings (or the “performance indicator” of not-forprofit
entities within the scope of the AICPA Audit and Accounting Guide, Health Care
Organizations) when there are credit losses associated with an impaired debt security for which
management asserts that it does not have the intent to sell the security and it is more likely than
not that it will not have to sell the security before recovery of its cost basis. In those situations,
the impairment should be separated into (a) the amount of the total impairment related to credit
1 FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments, indicates that cost includes adjustments made to the cost basis of an investment for accretion,
amortization, previous other-than-temporary impairments, and hedging.
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 2



losses and (b) the amount of the total impairment related to all other factors. The amount of the
total impairment related to credit losses should be included in earnings (or the “performance
indicator”). The amount of the total impairment related to all other factors should be included
in other comprehensive income (or should be excluded from the “performance indicator”). A
reporting entity is required to present separately the total amount of the impairment in the
statement of earnings (or the “performance indicator”) and the amount recognized in other
comprehensive income (or outside the “performance indicator”) as a deduction from the total
impairment.
Background
3. If the fair value of a debt or equity security is less than its cost basis at the measurement
date, U.S. GAAP requires that the reporting entity assess the impaired security to determine
whether the impairment is other than temporary. An other-than-temporary impairment
assessment requires, among other considerations, that the reporting entity assert that it has the
intent and ability to hold the security for a period of time sufficient to allow for any anticipated
recovery in fair value (SEC Staff Accounting Bulletin [SAB] Topic 5M, Other Than Temporary
Impairment of Certain Investments in Debt and Equity Securities, and AICPA Statement on
Auditing Standards No. 92, Auditing Derivative Instruments, Hedging Activities, and
Investments in Securities). Currently, other-than-temporary impairments are recognized entirely
in earnings (or the “performance indicator”).
4. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was signed into
law. Section 133 of the Act mandated that the U.S. Securities and Exchange Commission (SEC)
conduct a study on mark-to-market accounting standards. The SEC submitted its study to
Congress on December 30, 2008. One of the recommendations in the study was that the FASB
reassess current impairment accounting models for financial instruments. The SEC
recommended that the FASB “evaluate the need for modifications (or the elimination) of
current other-than-temporary impairment guidance to provide for a more uniform system of
impairment testing standards for financial instruments.”
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 3



5. On January 12, 2009, FSP EITF 99-20-1, Amendments to the Impairment Guidance of
EITF Issue No. 99-20, was issued to achieve more consistency between FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities, and EITF Issue No. 99-
20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and
Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,”
in the accounting for other-than-temporary impairments. However, constituents continue to
express concerns that the requirements for measurement and recognition of impairment losses
for loans are different from those for investments in debt securities and that financial statements
do not provide users with sufficient information about an entity’s credit losses (that is, the
amount of cash the entity expects to lose if it holds an investment to maturity). Some
constituents believe that the current market conditions have caused temporary declines in value
that do not reflect cash flows that will actually be collected.
6. This FSP more closely aligns the amounts recognized in earnings (or the “performance
indicator”) for impairments of debt securities and loans, unless it is likely that the entity will sell
a security before recovery of its cost basis. In that case, the Board decided that the entire loss
should be recorded in earnings (or the “performance indicator”). This FSP also improves the
way yields are reported on debt securities that are impaired, when the entity still expects to
collect the amounts due (because those losses would be reported in other comprehensive
income, not earnings or the “performance indicator”).
7. This FSP does not amend the requirement in Statement 115 (and Issue 99-20) to apply
the other-than-temporary impairment guidance and disclosures in FSP FAS 115-1 and FAS 124-
1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. Additionally, other aspects of determining whether a security is other-thantemporarily
impaired remain unchanged. For example, entities will still need to consider the
severity and duration of the impairment and the financial condition and near-term prospects of
the issuer. This FSP also does not result in a change in the reported value of securities in the
statement of financial position (that is, available-for-sale securities are reported at fair value and
held-to-maturity securities are reported at amortized cost unless they are other than temporarily
impaired, in which case they are adjusted to fair value). However, this FSP does require that
the impairment recognized in other comprehensive income for held-to-maturity securities be
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 4



amortized over the remaining life of the debt security. Investors have informed the Board that
the two key financial metrics that they use in evaluating many financial institutions are Tangible
Common Equity and Net Interest Margin. This FSP has little or no affect on Tangible Common
Equity, but does result in a Net Interest Margin that is more consistent with the cash flows of
the entity.
8. The Board understands that the staff of the SEC’s Office of the Chief Accountant plans to
amend SAB Topic 5M to conform with the guidance in this FSP.
9. Beyond the short-term changes in this FSP, the FASB has a joint project with the
International Accounting Standards Board to more broadly improve and achieve convergence
on their respective standards on accounting for financial instruments.
10. This FSP includes amendments to Statement 115, Statement 124, FSP FAS 115-1/124-1,
and Issue 99-20. Conforming changes to other standards may be necessary.
All paragraphs in this FSP have equal authority.
Paragraphs in bold set out the main principles.
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 5



FASB Staff Position
Scope
11. This FSP applies to other-than-temporary impairments of debt and equity
securities.
Recognition and Measurement
12. If a decline in fair value below the amortized cost exists at the measurement date for
a debt or equity security and the entity intends to sell the security or it is more likely than
not that an entity will sell the debt or equity security before recovery of its cost basis, an
other-than-temporary impairment exists. If an other-than-temporary impairment exists,
the entire amount of the impairment shall be recognized in earnings (or the “performance
indicator”). The fair value of the investment would become the new cost basis of the
investment and shall not be adjusted for subsequent recoveries in fair value.
13. If a decline in fair value below the amortized cost exists at the measurement date for
a debt security and it is more likely than not that an entity will not sell the debt security
before recovery of its cost basis but it is probable that the investor will be unable to collect
all amounts due according to the contractual terms of the security, the debt security shall
be considered other than temporarily impaired. The amount of the impairment related to
the credit losses shall be recognized in earnings (or the “performance indicator”). The
amount of the impairment related to other factors shall be recognized in other
comprehensive income (or shall be excluded from the “performance indicator”). The
previous cost basis less the impairment recognized in earnings would then become the new
cost basis of the investment and shall not be adjusted for subsequent recoveries in fair
value.
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 6



Subsequent Measurement
14. In periods after the recognition of an other-than-temporary impairment loss for
debt securities, an investor shall account for the other-than-temporarily impaired debt
security as if the debt security had been purchased on the measurement date of the otherthan-
temporary impairment at a cost equal to the previous basis less the impairment
recognized in earnings. That is, unless a sale is imminent, the discount or reduced
premium recorded for the debt security, based on the new cost basis, shall be amortized
over the remaining life of the debt security in a prospective manner based on the amount
and timing of future estimated cash flows.
15. The impairment recognized in other comprehensive income for held-to-maturity
securities shall be amortized (through other comprehensive income) over the remaining
life of the debt security in a prospective manner based on the amount and timing of future
estimated cash flows by offsetting the recorded value of the asset unless there is a
subsequent other-than-temporary impairment that is recognized in earnings (or the
“performance indicator”).
Presentation
16. In periods in which a reporting entity determines that a security’s decline in fair
value below the amortized cost basis is other than temporary, the reporting entity shall
present the total impairment in the statement of earnings (or the “performance
indicator”) with an offset for the amount of the total impairment that is recognized in
other comprehensive income (or outside the “performance indicator”), if any.
Disclosures
17. In periods in which a reporting entity determines that a security’s decline in fair
below the amortized cost basis is other than temporary and the total impairment is
separated between the amount of the total impairment related to credit losses and the
amount of the total impairment related to all other factors, an entity shall disclose the
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 7



methodology and key inputs used to measure the portion of the total impairment that
relates to credit losses.
Effective Date and Transition
18. The FSP shall be effective for interim and annual reporting periods ending after
March 15, 2009, and shall be applied prospectively.
The provisions of this FSP need not be applied to immaterial items.
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 8



Alternative View
Messrs. Linsmeier and Siegel do not support the issuance of this FSP. They believe that at this
time the most significant issue that requires short-term guidance relates to the determination of
fair value estimates in inactive markets. Specifically, some have asserted that in current market
conditions fair value estimates have only incorporated observable inputs from distressed sales.
Those constituents conclude that the fair value estimates are overly punitive and the primary
issue with existing other-than-temporary impairment guidance is that it results in larger values
for impairment losses recorded in earnings than otherwise should be the case. However,
Statement 157 indicates that fair value is the price to transfer an asset between a willing buyer
and a willing seller in an orderly transaction at the measurement date, which is inconsistent with
writing down to prices from distressed sales/broker quotes.
Messrs. Linsmeier and Siegel, therefore, believe the primary issue raised with current otherthan-
temporary impairment guidance will be addressed by ensuring that impairments are
marked down to a fair value estimate reflecting the price in an orderly transaction. As a result of
applying the guidance in the Proposed FSP 157-e, Determining Whether a Market Is Not Active
and a Transaction Is Not Distressed, they believe that fair value estimates will more closely
reflect a market participant’s view as to the ultimate cash flows to be collected from a fixed
income debt security and, thus, provide a reasonable estimate of the current value of the
impaired item. To the extent there is an other-than-temporary impairment, they believe that it
should be measured as the entire difference between the fair value and carrying value of the
impaired item with that change fully reflected in earnings as an unrealized loss.
Messrs. Linsmeier and Siegel believe that there are potentially other issues to address with the
current other-than-temporary impairment model. However, they would prefer to address those
concerns in the joint medium-term project with the International Accounting Standards Board
(IASB). They believe that risks are high that a unilateral change to the recognition and
presentation of other-than-temporary impairments could create the opportunity for an
“accounting arbitrage” with pressure for FASB and IASB standards to converge to the standard
perceived most lenient. In addition, changes by one standard setter acting on its own fails to
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 9



achieve convergence of accounting standards, which continues the challenges faced by investors
in comparing global financial institutions reporting under two different accounting models.
Messrs. Linsmeier and Siegel believe that investors generally have opined that their preference
is for fair value for financial instruments through earnings. While other financial statement
users might differ in that view, the difference in opinion often is due to concerns about
regulatory capital, as most users find increased worth in fair value information. Messrs.
Linsmeier and Siegel do not believe that investors require a bifurcation of the fair value writedown
between earnings and other comprehensive income when it is determined that an otherthan-
temporary impairment should be recognized because a credit loss event has occurred, as is
required in the proposed model in this FSP.
Messrs. Linsmeier and Siegel believe that the primary purpose for financial reporting is to serve
investors and that if a bifurcation of the full fair value change into credit and noncredit
components is needed to facilitate bank regulators in their regulatory capital decisions,
decomposition should be provided on the face of the income statement with both components
recognized in earnings consistent with investors’ preferences. Bank regulators then can choose
whether or not to include the noncredit portion of the fair value in regulatory capital
calculations. Messrs. Linsmeier and Siegel also object to bifurcating the impairment loss into
credit and noncredit components because they do not believe an incurred loss approach (as
proposed in this FSP) can isolate the credit loss from other losses (particularly liquidity risk) as
is advocated by those supporting this approach. In current market conditions, liquidity risk is
inextricably intertwined with credit risk, representing the discount associated with the
uncertainty of collection.
Additionally, when an instrument is not able to be held to recovery, Messrs. Linsmeier and
Siegel object to the proposed change in the trigger for recognition of the impairment loss. The
current requirements permit nonrecognition of an impairment loss when an entity can assert its
intent and ability to hold the instrument to recovery to its original cost. The proposed FSP
instead requires that the entity assess whether it intends to sell the security or whether it is more
likely than not that it will be required to sell the security before recovery to its cost basis. While
they understand that the primary objective for this change is to make the held-to-recovery
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 10



concept more operational, they also recognize a potential result will be to reduce the amount of
impairment loss recognized in the financial statements. A 1991 U.S. Treasury report cited
delayed recognition of impairment losses as having an exacerbating effect on the length and
ultimate cost of the savings and loan crisis. There also are potential parallels to the experience
in Japan when delays in recognition of losses resulted in the so-called lost decade in the 1990s.
Similarly, Messrs Linsmeier and Siegel are concerned that to the extent the proposed FSP
results in delayed recognition of impairment losses in earnings, there also may be a negative
impact on investor confidence.
Messrs. Linsmeier and Siegel do not agree with the inclusion of equity securities within the
scope of the FSP. They believe that unlike a debt security with contractual cash flow
requirements, it is impossible to positively assert that you can expect an impaired equity
security to ever recover to its original cost and, therefore, they do not consider the proposed new
impairment indicator to be operational; other indicators still apply.
Finally, the Board issued a proposed FSP in January that would have required the disclosure of
the expected credit loss component of the fair value change in the footnotes to the financial
statements, and constituents overwhelmingly indicated that it would not be possible to
determine that amount without better guidance. This proposed FSP provides similar guidance
for determining the credit portion of the fair value change and, therefore, Messrs. Linsmeier and
Siegel are concerned whether the proposed guidance will be operational. More importantly, they
are concerned that if the guidance is not operational, the reported information may not be a
faithful representation of the credit impairment.
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 11



Appendix
AMENDMENTS TO EXISTING PRONOUNCEMENTS
A1. FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, is amended as follows: [Added text is underlined and deleted text is struck out.]
a. Paragraph 16, as amended:
For individual securities classified as either available-for-sale or held-tomaturity,
an enterprise shall determine whether a decline in fair value below the
amortized cost basis is other than temporary. (If a security has been the hedged
item in a fair value hedge, the security’s “amortized cost basis” shall reflect the
effect of the adjustments of its carrying amount made pursuant to paragraph
22(b) of Statement 133.) For example, if it is probable that the investor will be
unable to collect all amounts due according to the contractual terms of a debt
security not impaired at acquisition, an other-than-temporary impairment shall
be considered to have occurred.4 If the decline in fair value is judged to be other
than temporary, the cost basis of the individual security shall be written down to
fair value as a new cost basis and the amount of the write-down shall be
included in earnings (that is, accounted for as a realized loss)the enterprise shall
apply paragraph 15 of FSP FAS 115-1/124-1, The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain Investments. The new
cost basis shall not be changed for subsequent recoveries in fair value.
Subsequent increases in the fair value of available-for-sale securities shall be
included in other comprehensive income pursuant to paragraph 13; subsequent
decreases in fair value, if not an other-than-temporary impairment, also shall be
included in other comprehensive income.
A2. FASB Statement No. 124, Accounting for Certain Investments Held by Not-for-Profit
Organizations, is amended as follows:
a. Footnote 3a, as amended:
Some investors, primarily health care organizations, indicated that because
Statement 115 requires business entities to report changes in fair value of
available-for-sale securities in a separate category of equity and to report heldto-
maturity securities at amortized cost, users would be unable to make
meaningful comparisons when not-for-profit organizations and business entities
are engaged in the same industry. This Statement allows an organization with
those comparability concerns to report in a manner similar to business entities
by identifying securities as available-for-sale or held-to-maturity and excluding
the unrealized gains and losses on those securities from an operating measure
within the statement of activities. Investors that report a “performance
indicator” as defined in the AICPA Accounting and Audit Guide, Health Care
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 12



Organizations, shall refer to FSP FAS115-1 and FAS124-1, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments,” and FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition
and Presentation of Other-Than-Temporary Impairments, when determining
impairment and evaluating whether the impairment is other than temporary.
A3. FASB Staff Position FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, is amended as follows:
a. Footnote 2:
Cost includes adjustments made to the cost basis of an investment for accretion,
amortization, previous other than-temporary impairments recognized in
earnings (or the “performance indicator”), and hedging.
b. Paragraph 14:
In applying that guidance, questions sometimes arise about whether an investor
shall recognize an other-than-temporary impairment only when it intends to sell
a specifically identified available-for-sale debt or equity security at a loss
shortly after the balance sheet date. When an investor has decided to sell an
impaired available-for-sale security and the investor does not expect the fair
value of the security to fully recover prior to the expected time of sale, the
security shall be deemed other-than-temporarily impaired in the period in which
the decision to sell is made. However, an investor shall recognize an impairment
loss when the impairment is deemed other than temporary even if a decision to
sell has not been made. An other-than-temporary impairment of a debt or equity
security has occurred if the investor intends to sell the security or it is more
likely than not that the investor will be required to sell the security before
recovery of its cost basis.
c. Paragraph 15:
If it is determined in Step 2 that the impairment is other than temporary, then an
impairment loss shall be recognized in earnings equal to the entire difference
between the investment's cost and its fair value at the balance sheet date of the
reporting period for which the assessment is made. The measurement of the
impairment shall not include partial recoveries subsequent to the balance sheet
date. The fair value of the investment would then become the new cost basis of
the investment and shall not be adjusted for subsequent recoveries in fair value.
the accounting for the impairment depends on whether the investor intends to
sell the security or it is more likely than not that the investor will sell the
security before recovery of its cost basis and, for a debt security, whether a
credit loss exists.
a. If the investor intends to sell the security or it is more likely than not that
the investor will sell a debt or equity security before recovery of its cost
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 13



basis, an impairment loss shall be recognized in earnings (or the
“performance indicator” of not-for-profit entities within the scope of the
AICPA Audit and Accounting Guide, Health Care Organizations) equal
to the entire difference between the investment's cost and its fair value at
the balance sheet date of the reporting period for which the assessment is
made, and fair value becomes the new cost basis of the security. No
distinction is made between credit losses (if any) and other factors
contributing to the loss.
b. If it is more likely than not that the entity will not sell a debt security
(classified as held-to-maturity or available-for-sale) before recovery of
its cost basis, but it is probable that the investor will be unable to collect
all amounts due according to the contractual terms of the security, the
impairment shall be separated into (1) the amount of the total
impairment related to credit losses and (2) the amount of the total
impairment related to all other factors. The amount of the total
impairment related to credit losses shall be reflected as an adjustment to
the cost basis of the security, with the offset recorded as an impairment
loss in earnings (or the “performance indicator”). The amount of the
total impairment related to all other factors shall be included in other
comprehensive income (or shall be excluded from the “performance
indicator”). In determining the amount of the total impairment related to
credit losses the reporting entity shall use its best estimate of the amount
of the impairment that relates to an increase in the credit risk associated
with the specific instrument. One way of estimating that amount would
be to consider the measurement methodology described in paragraphs
12–16 of FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan. For debt securities that are beneficial interests in
securitized financial assets within the scope of Issue 99-20 the amount of
the total impairment related to credit losses shall be determined
considering the guidance in paragraph 12(b) of Issue 99-20 related to
determining whether there has been an adverse change in estimated cash
flows from cash flows previously projected (that is, the cash flows
estimated at the current financial reporting date shall be discounted at a
rate equal to the current yield used to accrete the beneficial interest).
The previous cost basis less the impairment recognized in earnings (or the
“performance indicator”) would then become the new cost basis of the
investment and shall not be adjusted for subsequent recoveries in fair value.
d. Paragraph 16:
In periods subsequent to the recognition of an other-than-temporary impairment
loss for debt securities,5 an investor shall account for the other-than-temporarily
impaired debt security as if the debt security had been purchased on the
measurement date of the other-than-temporary impairment at a cost equal to the
previous basis less the impairment recognized in earnings (or the “performance
indicator”). That is, unless a sale is imminent, the discount or reduced premium
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 14



recorded for the debt security, based on the new cost basis, would be amortized
over the remaining life of the debt security in a prospective manner based on the
amount and timing of future estimated cash flows.
e. Paragraph 16A is added as follows:
The impairment recognized in other comprehensive income for held-to-maturity
securities shall be amortized (through other comprehensive income) over the
remaining life of the debt security in a prospective manner based on the amount
and timing of future estimated cash flows by offsetting the recorded value of the
asset unless there is a subsequent other-than-temporary impairment that is
recognized in earnings (or the “performance indicator”).
f. Paragraph 16B and its related heading are added as follows:
Presentation
In periods in which an enterprise determines that a security’s decline in fair
value below the amortized cost basis is other than temporary, the enterprise
shall present the total impairment in the statement of earnings (or the
“performance indicator”) with an offset for the amount of the total impairment
that is recognized in other comprehensive income (or outside of the
“performance indicator”), if any. For example:
Impairment losses on securities $xx,xxx
Noncredit-related losses on securities not expected to be
sold (recognized in other comprehensive income) (x,xxx)
Net impairment losses $xx,xxx
g. Paragraph 17:
For all investments in an unrealized loss6 position, including those that fall
within the scope of Issue 99-20, for which other-than-temporary impairments
have not been recognized in earnings (or the “performance indicator”), an
investor shall disclose the following in its annual financial statements (included
in this disclosure are investments for which a portion of the impairment has
been recognized in earnings (the portion related to credit losses) and a portion
has only been recognized in other comprehensive income):
a. As of each date for which a statement of financial position is presented,
quantitative information, aggregated by category of investment—each
category of investment that the investor discloses in accordance with
Statements 115 and 124 (see paragraph 4(b)) and cost-method investments—
in tabular form:
(1) The aggregate related fair value of investments with unrealized
losses
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 15



(2) The aggregate amount of unrealized losses (that is, the amount by
which cost exceeds fair value).
The disclosures in (1) and (2) above shall be segregated by those investments
that have been in a continuous unrealized loss position for less than 12
months and those that have been in a continuous unrealized loss position for
12 months or longer. The reference point for determining how long an
investment has been in a continuous unrealized loss position is the balance
sheet date of the reporting period in which the impairment is identified. For
entities that do not prepare interim financial information, the reference point
would be the annual balance sheet date of the period during which the
impairment was identified. The continuous unrealized loss position ceases
upon either (a) the recognition of the total amount by which cost exceeds fair
value as an other-than-temporary impairment in earnings (or the
“performance indicator”) or (b) the investor becoming aware of a recovery of
fair value up to (or beyond) the cost of the investment during the period.
b. As of the date of the most recent statement of financial position, additional
information (in narrative form) that provides sufficient information to allow
financial statement users to understand the quantitative disclosures and the
information that the investor considered (both positive and negative) in
reaching the conclusion that the impairment(s) are not other than temporary.
The application of Step 2 shall provide insight into the investor's rationale for
concluding that unrealized losses are not other-than-temporary impairments.
The disclosures required may be aggregated by investment categories, but
individually significant unrealized losses generally shall not be aggregated.
This disclosure could include:
(1) The nature of the investment(s)
(2) The cause(s) of the impairment(s)
(3) The number of investment positions that are in an unrealized loss
position
(4) The severity and duration of the impairment(s)
(5) Other evidence considered by the investor in reaching its conclusion
that the investment is not other-than-temporarily impaired, including,
for example, industry analyst reports, sector credit ratings, volatility of
the security's fair value, and/or any other information that the investor
considers relevant.
h. Paragraph 18A is added as follows:
In periods in which an enterprise determines that a security’s decline in fair
below the amortized cost basis is other than temporary, and the total impairment
is separated between the amount of the total impairment related to credit losses
and the amount of the total impairment related to all other factors, entities shall
disclose the methodology and key inputs used to measure the portion of the total
impairment that relates to credit losses.
i. Paragraph A2:
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 16



U.S. Treasury Obligations. The unrealized losses on the Company’s
investments in U.S. Treasury obligations and direct obligations of U.S.
government agencies were caused by interest rate increases. The contractual
terms of those investments do not permit the issuer to settle the securities at a
price less than the amortized cost of the investment. Because the Company has
the ability and intent to hold those investments until a recovery of fair value
does not intend to sell the investments and it is more likely than not that the
Company will not be required to sell the investments before recovery of its cost
basis, which may be maturity, the Company does not consider those investments
to be other-than-temporarily impaired at December 31, 20X3.
j. Paragraph A3:
Federal Agency Mortgage-Backed Securities. The unrealized losses on the
Company’s investment in federal agency mortgage-backed securities were
caused by interest rate increases. The Company purchased those investments at
a discount relative to their face amount, and the contractual cash flows of those
investments are guaranteed by an agency of the U.S. government. Accordingly,
it is expected that the securities would not be settled at a price less than the
amortized cost of the Company’s investment. Because the decline in market
value is attributable to changes in interest rates and not credit quality, and
because the Company has the ability and intent to hold those investments until a
recovery of fair valuedoes not intend to sell the investments and it is more likely
than not that the Company will not be required to the investments before
recovery of its cost basis, which may be maturity, the Company does not
consider those investments to be other-than-temporarily impaired at December
31, 20X3.
k. Paragraph A4:
Corporate Bonds. The Company’s unrealized loss on investments in corporate
bonds relates to a $150 investment in Manufacturing Company’s Series C
Debentures. The unrealized loss was primarily caused by (a) a recent decrease
in profitability and near-term profit forecasts by industry analysts resulting from
intense competitive pricing pressure in the manufacturing industry and (b) a
recent sector downgrade by several industry analysts. The contractual terms of
those investments do not permit Manufacturing Company to settle the security
at a price less than the amortized cost of the investment. While Manufacturing
Company’s credit rating has decreased from A to BBB (S&P), the Company
currently does not believe it is probable that it will be unable to collect all
amounts due according to the contractual terms of the investment. Therefore, it
is expected that the debentures would not be settled at a price less than the
amortized cost of the investment. Because the Company has the ability and
intent to hold this investment until a recovery of fair valuedoes not intend to sell
the investment and it is more likely than not that the Company will not be
FSP FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 17



required to sell the investment before recovery of its cost basis, which may be
maturity, it does not consider the investment in Manufacturing Company’s
debentures to be other-than-temporarily impaired at December 31, 20X3.
l. Paragraph A5:
Marketable Equity Securities. The Company’s investments in marketable
equity securities consist primarily of investments in common stock of
companies in the consumer tools and appliances industry ($17 of the total fair
value and $2 of the total unrealized losses in common stock investments) and
the air courier industry ($27 of the total fair value and $6 of the total unrealized
losses in common stock investments). Within the Company’s portfolio of
common stocks in the consumer tools and appliances industry (all of which are
in an unrealized loss position) approximately 26 percent of the total fair value
and 21 percent of the Company’s total unrealized losses are in Company R. The
remaining fair value and unrealized losses are distributed in six companies. The
severity of the impairment (fair value is approximately 5 percent to 12 percent
less than cost) and the duration of the impairment (less than 3 months) correlate
with the weak 20X3 year-end sales experienced within the consumer tools and
appliance industry, as reflected in lower customer transactions and lower-thanexpected
performance in traditional gift categories like hardware and power
tools. The Company evaluated the near-term prospects of the issuer in relation
to the severity and duration of the impairment. Based on that evaluation and the
Company’s ability and intent to hold those investments for a reasonable period
of time sufficient for a forecasted recovery of fair value fact that the Company
does not intend to sell these investments and it is more likely than not that the
Company will not be required to sell the investments before recovery of their
cost bases, the Company does not consider those investments to be other-thantemporarily
impaired at December 31, 20X3.
m. Paragraph A6:
The Company’s portfolio of common stocks in the air courier industry consists
of investments in 4 companies, 3 of which (or 78 percent of the total fair value
of the investments in the air courier industry) are in an unrealized loss position.
The air courier industry and the Company’s investees are susceptible to changes
in the U.S. economy and the industries of their customers. A substantial number
of their principal customers are in the automotive, personal computer,
electronics, telecommunications, and related industries, and their businesses
have been adversely affected by the slowdown of the U.S. economy,
particularly during the second half of 20X3 when the Company’s investments
became impaired. In addition, the credit ratings of nearly all companies in the
portfolio have decreased from A to BBB (S&P or equivalent designation). The
severity of the impairments in relation to the carrying amounts of the individual
investments (fair value is approximately 17 percent to 23 percent less than cost)
is consistent with those market developments. The Company evaluated the nearFSP
FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 18



term prospects of the issuers in relation to the severity and duration of the
impairment. Based on that evaluation and the Company’s ability and intent to
hold those investments for a reasonable period of time sufficient for a forecasted
recovery of fair valuefact that the Company does not intend to sell these
investments and it is more likely than not that the Company will not be required
to sell the investments before recovery of their cost bases, the Company does
not consider those investments to be other-than-temporarily impaired at
December 31, 20X3.
n. Paragraph A8:
The remaining $21 of cost-method investments consists of 1 investment in a
privately owned company in the consumer tools and appliance industry. That
investment was evaluated for impairment because of an adverse change in the
market condition of companies in the consumer tools and appliance industry. As
a result of that evaluation, the Company identified an unrealized loss of $1. The
severity of the impairment (fair value is approximately 5 percent less than cost)
and the duration of the impairment (less than 3 months) correlate with the weak
20X3 year-end sales experienced within the consumer tools and appliance
industry, as reflected by lower customer transactions and lower-than-expected
performance in traditional gift categories like hardware and power tools. Based
on the Company’s evaluation of the near-term prospects of the investee and the
Company’s ability and intent to hold the investment for a reasonable period of
time sufficient for a forecasted recovery of fair value fact that the Company
does not intend to sell these investment and it is more likely than not that the
Company will not be required to sell the investment before recovery of its cost
basis, the Company does not consider that investment to be other-thantemporarily
impaired at December 31, 20X3.
A4. EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in
Securitized Financial Assets,” is amended as follows:
a. Paragraph 5(e), as amended:
Are not beneficial interests in securitized financial assets that (1) are of high
credit quality (for example, guaranteed by the U.S. government, its agencies, or
other creditworthy guarantors, and loans or securities sufficiently collateralized
to ensure that the possibility of credit loss is remote) and (2) cannot
contractually be prepaid or otherwise settled in such a way that the holder would
not recover substantially all of its recorded investment. Instead, interest income
on such beneficial interests should be recognized in accordance with the
provisions of Statement 91, and determining whether an other-than-temporary
impairment of such beneficial interests exists should be based on FSP FAS
115-a/FAS 124-a/EITF 99-20-b, Recognition and Presentation of Other-ThanFSP
FAS 115-a, FAS 124-a, and EITF 99-20-b
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 19



Temporary Impairments, FSP EITF 99-20-1, FSP FAS 115-1/124-1, Statement
115, SAB 59, SAS 92, and the Statement 115 Special Report.
b. Paragraph 12, as amended:
[The original Task Force consensus was superseded by FSP EITF 99-20-1 and
FSP FAS 115-a/FAS 124-a/EITF 99-20-b.] The holder of a beneficial interest
should continue to update the estimate of cash flows over the life of the
beneficial interest. If upon evaluation:
a. Based on current information and events it is probable that there is a
favorable (or an adverse) change in estimated cash flows from the cash flows
previously projected, then the investor should recalculate the amount of
accretable yield for the beneficial interest on the date of evaluation as the
excess of estimated cash flows over the beneficial interest’s reference amount
(the reference amount is equal to (1) the initial investment less (2) cash
received to date less (3) other-than-temporary impairments recognized in
earnings (or the “performance indicator”) to date [as described in paragraph
12(b)] plus (4) the yield accreted to date). The adjustment should be
accounted for prospectively as a change in estimate in conformity with
Statement 154 [Note: See paragraph 25 of the Status section.], with the
amount of periodic accretion adjusted over the remaining life of the
beneficial interest. Based on estimated cash flows, interest income may be
recognized on a beneficial interest even if the net investment in the beneficial
interest is accreted to an amount greater than the amount at which the
beneficial interest could be settled if prepaid immediately in its entirety.
b. The fair value of the beneficial interest has declined below its reference
amount, an enterprise should determine whether the decline is other-thantemporary.
An entity should apply the impairment of securities guidance in
paragraph 16 of Statement 115 and the related implementation guidance (see
paragraphs 13, 13A, 13B, and 15 of this Issue). If based on current
information and events it is probable that there has been an adverse change in
estimated cash flows (in accordance with paragraph 12(a) above), then (1) an
other-than-temporary impairment should be considered to have occurred and
(2) the beneficial interest should be written down to fair value with the
resulting change being includedrecognized in accordance with paragraph 15
of FSP FAS 115-1/124-1 and presented in the income statement in
accordance with paragraph 16B of FSP FAS 115-1/124-1. Determining
whether there has been a favorable (or an adverse) change in estimated cash
flows from the cash flows previously projected (taking into consideration
both the timing and amount of the estimated cash flows) involves comparing
the present value of the remaining cash flows as estimated at the initial
transaction date (or at the last date previously revised) against the present
value of the cash flows estimated at the current financial reporting date. The
cash flows should be discounted at a rate equal to the current yield used to
accrete the beneficial interest. If the present value of the original cash flows
estimated at the initial transaction date (or the last date previously revised) is
less than the present value of the current estimated cash flows, the change is
considered favorable (that is, an other-than-temporary impairment should be
considered to have not occurred under the consensus in this Issue). If the
present value of the original cash flows estimated at the initial transaction
date (or the last date previously revised) is greater than the present value of
the current estimated cash flows, the change is considered adverse (that is, an
other-than-temporary impairment should be considered to have occurred
under the consensus in this Issue). However, absent any other factors that
indicate an other-than-temporary impairment has occurred, changes in the
interest rate of a “plain-vanilla,” variable-rate beneficial interest generally
should not result in the recognition of an other-than-temporary impairment
(see footnote 2, Exhibit 99-20A) (a plain-vanilla, variable-rate beneficial
interest does not include those variable-rate beneficial interests with interest
rate reset formulas that involve either leverage or an inverse floater).
c. Paragraph 15, as amended:
The Task Force observes that, consistent with Topic No. D-44, “Recognition
of Other-Than-Temporary Impairment upon the Planned Sale of a Security
Whose Cost Exceeds Fair Value,” when an entity intends to sell a specifically
identified beneficial interest classified as available-for-sale at a loss shortly
after the balance sheet date whose fair value is less than its carrying amount
and the entity does not expect the fair value to recover prior to the expected
time of the sale, a write-down for other-than-temporary impairment should be
recognized in earnings in the period in which the decision to sell is made.
[Note: See paragraph 28 of the STATUS section.] Furthermore, SAB 59,
SAS 92, the Statement 115 Special Report, and FSP FAS115-1/124-1
provide additional guidance to consider when determining whether an otherthan-
temporary impairment exists. For example, an other-than-temporary
impairment exists if as FSP FAS115-1/124-1 states, “The investor intends to
sell the security or it is more likely than not that the investor will be required
to sell the security before the recovery of its cost basis.”SAB Topic 5M
states, “[The holder does not have] the intent and ability . . . to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in market value.”
d. Paragraph 29A is added as follows:
FSP FAS 115-a/FAS 124-a/EITF 99-20-b, issued in April 2009, amends
paragraphs 5(e), 12, and 15 of Issue 99-20. These amendments are conforming
changes that reflect the Board’s decisions to amend guidance for recognizing
and presenting other-than-temporary impairments.
Proposed FSP on Statement 115, Statement 124, and EITF Issue 99-20
(FSP FAS 115-a, FAS 124-a, EITF 99-20-b) 20

oreville

SUMMARY OF BOARD DECISIONS

Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final standard.

April 2, 2009 Board Meeting

Determining whether a market is not active and a transaction is not distressed. The Board discussed comment letters received on proposed FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed. In response to comment letters and additional feedback received, the Board decided to make significant revisions to the proposed FSP. The Board decided that the final FSP would

1. Affirm that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions (that is, in the inactive market).

2. Clarify and include additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active.

3. Eliminate the proposed presumption that all transactions are distressed (not orderly) unless proven otherwise. The FSP will instead require an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence.

4. Include an example that provides additional explanation on estimating fair value when the market activity for an asset has declined significantly.

5. Require an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the FSP and to quantify its effects, if practicable.

6. Apply to all fair value measurements when appropriate.

The Board also affirmed its previous decision that the FSP would be applied prospectively and that retrospective application would not be permitted. The Board decided that the FSP would be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Board decided that an entity early adopting this FSP must also early adopt FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments. Additionally, if the entity elects to early adopt FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, it must also elect to early adopt this FSP and FSP FAS 115-2, FAS 124-2, and EITF 99-20-2.

The Board directed the staff to proceed to a draft of the final FSP for vote by written ballot.

Recognition and presentation of other-than-temporary impairments. The Board discussed comment letters received on proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments. The Board made the following decisions in response to comment letters and additional feedback received:

Scope
1. The Board decided that the change to existing guidance for determining whether an impairment is other than temporary should be limited to debt securities.

Recognition
2. The Board decided to replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert

1. It does not have the intent to sell the security; and

2. It is more likely than not it will not have to sell the security before recovery of its costs basis.

3. The guidance will incorporate examples of factors from existing literature that should be considered in determining whether a debt security is other-than-temporarily impaired and how those factors interact with the requirement to assert that the entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis.

4. When an entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

5. An entity will be required to recognize noncredit losses on held-to-maturity debt securities in other comprehensive income and amortize that amount over the remaining life of the security in a prospective manner by offsetting the recorded value of the asset unless the security is subsequently sold or there are additional credit losses.

6. The FSP will include guidance stipulating that credit losses should be measured on the basis of an entity’s estimate of the decrease in expected cash flows, including those that result from an increase in expected prepayments.

7. The guidance will clarify that existing premiums or discounts and subsequent changes in estimated cash flows or fair value should continue to be accounted for in accordance with existing guidance (for example, EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets”).

Presentation
8. An entity will be required to present the total other-than-temporary impairment in the statement of earnings with an offset for the amount recognized in other comprehensive income.

9. An entity will be required to present separately in the financial statement where the components of other comprehensive income are reported, amounts recognized in accumulated other comprehensive income related to the noncredit portion of other-than-temporary impairments recognized for available-for-sale and held-to-maturity debt securities.

Disclosures
10. The disclosure requirements of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, will be modified to require an entity to provide the following:

1. The cost basis of available-for-sale and held-to maturity debt securities by major security type

2. The methodology and key inputs, such as performance indicators of the underlying assets in the security, loan to collateral value ratios, third-party guarantees, levels of subordination, and vintage, used to measure the portion of an other-than-temporary impairment related to credit losses by major security type

3. A rollforward of amounts recognized in earnings for debt securities for which an other-than-temporary impairment has been recognized and the noncredit portion of the other-than-temporary impairment that has been recognized in other comprehensive income.

11. Statement 115 and FSP FAS 115-1 and FAS 124-1 will also be modified to require that major security classes be based on the nature and risks of the security and additional types of securities will be included in the list of major security types listed in Statement 115.

12. The above additional disclosures, as well as all existing Statement 115 and FSP FAS 115-1 and FAS 124-1 disclosures, will be required for interim periods

When adopting the new guidance, an entity will be required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-temporary impairment from retained earnings to accumulated other comprehensive income if the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery. The cost basis used to calculate accretable yield will also be adjusted to reflect this adjustment (that is, the entity will no longer accrete the noncredit component of a previously recognized other-than-temporary impairment through earnings).

The Board decided that the FSP will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Board decided that an entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed. Additionally, if the entity elects to early adopt FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS 157-4, it must also elect to early adopt this FSP.

The Board directed the staff to proceed to a draft of the final FSP for vote by written ballot.

Interim disclosures about fair value of financial instruments. The Board redeliberated proposed FSP FAS 107-b and APB 28-a, Interim Disclosures about Fair Value of Financial Instruments, in light of comments received and decided to proceed to a final FSP. The final FSP will amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require an entity to provide disclosures about fair value of financial instruments in interim financial information.

The Board affirmed its previous decision that the FSP would apply to all financial instruments within the scope of Statement 107. The Board also affirmed its previous decision to require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements.

The Board decided that only public entities would be required to provide the fair value disclosures in interim financial information.

The Board decided that the FSP would be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Board decided that an entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, and FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments.

The Board directed the staff to proceed to a draft of the final FSP for vote by written ballot.

Insurance contracts. The Board continued deliberating the joint project on accounting for insurance contracts by discussing what cash flows an entity would use in measuring the fulfillment value of an insurance contract.

The Board agreed that a measurement of the fulfillment value of an insurance contract should use expected cash flows rather than a best estimate of cash flows. The Board also agreed that those expected cash flows should be updated each period.

The Board discussed whether market inputs should be part of the measurement of cash flows when a fulfillment value notion is used. The Board agreed that the measurement of cash flows should consider all available information that represents the fulfillment of the insurance contract. All available information includes, but is not limited to, industry data, historical data of an entity’s costs, and market inputs when those inputs are relevant to the fulfillment of the contract.

Conceptual framework: objective and qualitative characteristics. The Board reviewed responses to the Exposure Draft, Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information, and affirmed the proposals in the chapter on Objective, including the proposals on the objective of financial reporting and the primary user group. The Board decided to clarify that financial reports do not necessarily exclude forward-looking or prospective information. The description of an economic phenomenon should be amended to reflect this decision.

The Board directed the staff to proceed to drafting:

1. The final versions of the chapters on the objective of financial reporting and the qualitative characteristics of and constraints on financial reporting

2. The Exposure Draft on the reporting entity concept.

roadrunner

So does all this come down to defining what "orderly" might mean, in varying situations?

Suddenly, I don't have much of a problem with Bill Clinton trying to redefine the meaning of "IS."

roadrunner