The Financial Accounting Standards Board has proposed a change to its rules that may help financial institutions limit their losses on mortgage- and other asset-backed investments, according to FinancialWeek.
The change could help the stock prices of banks and insurers, but won’t necessarily eliminate their need to raise more capital.
Criticism of Financial Accounting Standard 157, which describes how such instruments must be accounted for at fair value, the FASB has proposed that preparers of financial statements can take into account expected cash flows when testing such securities for impairment whether they are classified as available for sale or as held to maturity, according to FW.
Under the new proposal, assets trading at low prices need not be treated as permanently impaired so losses on them can be included on comprehensive income rather than earnings.
“Regaining investor confidence during this global credit crisis requires both immediate action and a plan for long-term improvement in the accounting for financial instruments,” said FASB Chairman Robert Herz in a statement announcing the change posted to the board’s website. “By issuing these proposed [staff positions], the FASB is taking immediate steps to reduce complexity and make the accounting for these instruments easier to understand.”
The proposed change in impairment testing would not affect banks’ balance sheets, changes to net income are included in “tier one” capital. The new rule may influence regulators’ views of what they considered adequate.