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Letters to Regulators
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
August 26, 2004
Mr. Robert Herz
Mr. Lawrence W. Smith
RE: Emerging Issues Task Force Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments"
Dear Mr. Herz and Mr. Smith:
The Independent Community Bankers of America (ICBA)1 urges the Financial Accounting Standards Board to revisit EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Instruments," due to the significant concerns expressed by many community banks about its interpretation. We urge you postpone the effective date of September 30, 2004 so its interpretation can be resolved.
EITF 03-1 requires that an investor have the intent and ability to hold an investment until a forecasted recovery of fair value up to or beyond the cost of the debt security in order to determine that the impairment is temporary. If the investor does not have the intent and ability to hold the security in accordance this requirement, then an "other than temporary impairment" must be recognized. This must be done regardless of whether the investor believes that no credit concerns exist with respect to an investment in a debt security.
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."
Although the issue addressed in EITF 03-1 is not a new one, having been discussed by the Emerging Issues Task Force (EITF) for more than a year and having produced two consensuses, the very restrictive and likely unintended interpretations of it now being adopted by some accounting firms has caused ICBA members great concern. As a result, we are asking FASB to postpone the application of the March 2004 consensus of EITF 03-1 in order to clarify its intended application and to receive and consider our newfound concerns given some of the interpretations currently being discussed.
In the past few weeks, it has become clear that, at a minimum, some accounting firms intend to interpret EITF 03-1 in a manner that was unforeseen, and surprising, and that would threaten the ability of banks to manage their asset/liability and liquidity positions in a manner consistent with safe and sound business and banking practices.
The application was unforeseen even though we have followed the evolution of EIFT 03-1. Consistently throughout the discussion process of EITF 03-1, members of the EITF seemed appropriately reluctant to trigger impairment of debt securities due to changes in interest rates. In addition, the EITF did not appear to indicate a desire to greatly alter the appropriate management of "available-for-sale" investment securities as called for by FAS 115. Furthermore, there did not seem to be a desire on the part of FASB to extend other-than-temporary impairment of debt securities beyond credit risk situations.
Even conversations with accountants and regulators in the months immediately following the March consensus did not set off concerns as those we talked to did not foresee any major impact on debt securities. For example, widespread impairment of Treasury securities as well as widespread limitations on the sale of available-for-sale securities were not contemplated. In part, they were not contemplated because the language being cited by some for such treatment mirrored language in the SEC's 1985 Staff Accounting Bulletin 59 requiring an "intent and ability to hold."
If these restrictive applications stand, it will completely change how banks manage their investment securities, depriving them of the ability to use this component of their balance sheet to manage their asset/liability and liquidity positions. If this draconian application had existed in 2000, banks would have faced two equally unacceptable alternatives - sell a few securities to fund loan growth and face other-than-temporary impairment of the entire investment portfolio or turn down a quality loan. Both alternatives would have been contrary to good business practices.
The restrictive application of EITF 03-1, which some accounting firms are describing, does not further the objective of more transparent and reflective financial statements. Instead, it represents the biggest change in accounting for investment securities since FAS 115's adoption, one that distorts banks' financial statements and undermines banks' ability to appropriately manage their business. FAS 115 not only significantly changed accounting methods, but it also significantly changed how banks manage their investment portfolios. FAS 115 provided investment classifications that reflected business reality. Unfortunately, the troubling interpretation of EITF 03-1 takes a large step away from business reality.
While the expedient request may be to obtain a clearer, industry-applicable definition of "intent and ability to hold until a forecasted market price recovery" under EITF 03-1's discussion of debt securities, we believe that such a request would understate the problem and ramifications. As a result, in addition to requesting an immediate postponement of the application of EITF 03-1, we request that a conference be convened including representatives of the banking industry, banking regulators, FASB, the SEC, and others to discuss guidance which may accomplish the aim of EITF 03-1 without the problems which are now evident.
We look forward to further discussions and to finding a workable solution to this issue. Please contact Ann M. Grochala at (202) 659-8111 or firstname.lastname@example.org to discuss this further.
Camden R. Fine
1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to protecting the interests of the community banking industry. ICBA aggregates the power of its 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. For more information, visit ICBA's website at www.icba.org.