Banks tout use of FAS 115

The debate over FAS 157 has segued into a debate over the use of FAS 115. Big banks, frustrated that they are still required to comply with mark-to-market rules, are starting to push for the use of FAS 115, which applies to impaired securities, reports Bloomberg.

Citigroup has offered an example of how the rule would affect valuations of the mortgage-backed securities it owns; a rule change would cut a third-quarter charge to $19.2 million from $76.2 million. FAS 115 relies more on the cash generated from underlying securities--not on fair values. In many ways, this is a politically correct solution for banks; it allows them to support FAS 157, as many investor advocates do and get relief on their toxic assets.  

One wrinkle in this movement is that international accounting standards seem to be moving in this direction. There has been a recent change to IAS 39, the international accounting standard that mirrors FAS 115, notes CFO.com. That change, which generated lots of controversy, has led to more big foreign banks--on their international books anyway--to reclassify assets as "held to maturity" or "available for sale," which means they could be eligible for FAS 115 treatment. That would eliminate the need to tally securities at fair value.

The rule is meant to apply in rare circumstances. One could make a case that such circumstances now exist.

But IAS 39 diverges from its American counterpart in one big way: IAS companies are allowed to retroactively reclassify financial assets at their July 1, 2008 value. Under FAS 115, companies would have to reprice assets on the day they are reclassified. FAS 115 thus would be a lot more palatable to supporters of fair value than would IAS 39.

In general, Moody's has taken exception with the change to IAS 39, fearing the effects on accounting comparability and consistency. But given the lingering weight of distressed mortgage-related securities and the more strict FAS 115, more banks seem to be in favor of applying the rule a bit more broadly. Others would like more guidance in this area. We can expect a lively rebuttal from the many supporters of fair value. - Jim