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Letters to Regulators

2004 Annual FASAC Survey

August 31, 2004

Teresa S. Pulley
Executive Director
Financial Accounting Standards Advisory Council
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116

Re: 2004 Annual FASAC Survey

Dear Ms. Polley:

The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to comment on the survey published by the Financial Accounting Standards Advisory Council (FASAC) which is designed to advise the Financial Accounting Standards Board (FASB) on issues related to projects on FASB's agenda, and possible new agenda items, and project priorities.

If the FASB was setting its agenda today, the most important issues that the ICBA believes that the Board should address are EITF 03-1, Loan Participations, Differential Accounting Standards and Codification of GAAP.

EITF 03-1

In a letter dated August 26, 2004, ICBA asked that FASB postpone the implementation of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Instruments," and revisit the guidance due to the problems that have arisen about its interpretation. We are concerned that some in the accounting profession are now suggesting that as few as two sales of securities at a loss from the available-for-sale account could indicate that there was an intent to sell all similar securities under that classification. This could taint the entire portfolio and necessitate the permanent right down of all such securities, regardless of the length of time they are expected to be held. We do not believe that this is consistent with FAS 115, "Accounting for Certain Investments in Debt and Equity Securities."

Loan Participations

The issue of loan participations should be resolved so as to permit the use of sales treatment for participations subject to set off rights. As we wrote in a letter to FASB dated May 19, 2004, loan participations are a fundamental tool that community banks use to provide credit to small businesses and consumers. If consummating loan participations became more complex, this would become a competitive problem and a burden for community banks. Community banks would find it very burdensome if they were required, for instance, to include the borrower as a party to the loan participation every time they attempted to participate a loan or if they were required to obtain a legal opinion or a true sale opinion on each participation.

Similarly, requiring community banks to form qualifying special purpose entities in order to receive sale treatment would be unnecessarily burdensome and prohibitively expensive, critically impairing their ability to engage in loan participations. If community banks cannot sell participations and derecognize the portion of the loans participated, it would significantly limit their ability to manage and disperse credit risk, negatively impacting their safety and soundness.

Differential Accounting Standards

ICBA strongly urges FASB to develop separate accounting standards for small or medium sized entities. Community banks already comply with most provisions of the Sarbanes-Oxley Act (the Act) and we heartily agree with FASB's statement in the survey that costs are significant for compliance with the Act and fall disproportionately to small and medium sized entities that may not have the same level of technical resources that larger entities do.

The corporate governance, auditing and accounting reforms of the Act have greatly increased regulatory burden and costs for community banks that are public companies. Many expect accounting and auditing fees to double as a result of the Act, with little additional benefit for shareholders or customers. For community banks that are heavily regulated and supervised, the rules add little benefit and make it more difficult to attract competent persons to serve as directors.

The majority of ICBA members are not publicly traded and often they have a relatively small group of shareholders that have a greater knowledge of the institution and its management and directors than do the majority of investors of very large publicly held companies. Because of their relatively small size, the operations of community banks generally are not complex. Yet, the smallest community banks are subject to the same rigorous accounting requirements as the largest, most complex publicly held institutions. Community banks have long voiced objections to burdensome and costly accounting requirements imposed on them that are not efficient and effective in improving knowledge about their financial condition.

The same is the case for most small business customers of community banks. Community banks have long questioned the value of audited financial statements for many of the small business customers they lend to. Bankers often do not see that such statements improve their knowledge of the business enough to require that the small business provide audited statements to obtain credit. Community banks have told ICBA that because of the increasing complexity of GAAP, they require audited financial statements of their small business customers less and less often, due to the cost burden.

We ask that FASB place a high priority on developing differential accounting standards in recognition that "one size does not fit all" in financial reporting and ensure that the cost of accounting standards not exceed the benefits. We also support the efforts of the AICPA to consider different, less burdensome, requirements for privately held institutions.

Codify GAAP

The survey indicates that FASAC members have expressed support for the Board to pursue a project to codify and simplify GAAP. The project would create a codification and a related searchable database of all authoritative US GAAP in one source, organized topically by subject area. Each topical section would contain a rewrite of all existing FASB, EITF, and AICPA authoritative US GAAP literature, and would also include SEC literature. The codification would become the authoritative source of U.S. GAAP and would eliminate the substantial number of documents that an individual must assess now to resolve an accounting issue.

ICBA believes that this should be a priority project, even if FASB would need to delay other projects. To research an accounting issue, one must search a variety of sources. While the Internet has facilitated research, we believe that FASB would perform a great service to statement preparers and users and others if it would develop one source for accounting literature and make it easily accessible. We also encourage FASB to simplify GAAP where possible and eliminate redundancies in guidance. This project would be particularly valuable to community banks and their small business customers. Providing one authoritative source that organizes accounting literature in a user friendly manner would enable community banks to use their limited accounting and credit analysis staff more efficiently and effectively.

International Convergence

While community banks do not see the urgency for international convergence that internationally focused institutions may, we recognize the value in FASB's work towards a single set of high-quality accounting standards for domestic and cross-border financial reporting. ICBA members only operate domestically but may have small business customers that could be affected by these efforts.

We urge FASB, as it works towards international convergence, to keep in mind that smaller domestic companies may find it particularly challenging if they must comply with standards developed for international purposes. Also, in our view, FASB should undertake projects that must be addressed for domestic standards, even if the International Accounting Standards Board may not be in a position to address them at the time.

Thank you for the opportunity to comment. If you need additional information or have any questions, please contact Ann Grochala, ICBA director of lending and accounting policy, at 202-659-8111 or ann.grochala@icba.org.


Charles Saeman
Chairman, ICBA Lending Committee
President, State Bank of Cross Plains

1 ICBA represents the largest constituency of community banks in the nation and is dedicated exclusively to protecting the interests of the community banking industry. We aggregate the power of our members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace.

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