Peeling away financial reporting issues one layer at a time

FASB Fiddles (Again) While Banks Burn (Us Again)

While on the cusp of one more financial crisis, the time has come to ask yet again: What is the FASB accomplishing that will fix the deeply flawed accounting by banks for loan losses? Answer: nada, nichts, bupkis, absolutely nothing.

Instead, the FASB has been wallowing in the muck of “other comprehensive income.” If you think that’s even the slightest bit harsh on my part, kindly consider that no less an authority than the FASB itself has, on at least two occasions that I can recall (SFAS 130 and a concepts statement), referred to OCI as “dirty surplus.”

Freshly dragged out of the mire comes ASU 2016-01, which barely passed by a 4-3 vote.  It did little more than to transfer the parking permit in AOCI for unrealized gains/losses on available-for-sale equity securities to an arbitrary portion of the unrealized gains/losses on liabilities measured at fair value (under the fair value option).

Some of the more notable aspects of ASU 2016-01 are what it does not do or say.  Let’s start with the summary; and judge for yourself whether my black-lined version is more forthright:

It was clear long before the global economic crisis further highlighted the need for improvement in the accounting models for financial instruments in today’s complex economic environment. of 2008 that the accounting for loan losses by banks is profoundly flawed. As a result, the main objective in developing this Update is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. Yet, a bare majority of the Board is unwilling to pass a standard that the too-big-to-fail banks disapprove of. Consequently, this Update moves a few things around to convey the false impression of accomplishments that investors value.

The Board also is addressing measurement of credit losses on financial assets in a separate project. Do not expect anything from the Board to actually fix loan accounting by banks, and to help avert another financial crisis, so long as the Financial Accounting Foundation is in charge of appointing the members of the FASB.

Along the lines of that last editorial correction, even more notable is how that 4-3 vote was split.  It fully reflects that there are at present three species of Board members:

  • Three former Big Four Partners, whose former clients are strongly opposed to expanding the use of fair value to loans or investments in debt instruments.
  • One member to contribute a “strong private company financial reporting perspective.”  Private companies are even more vehement in their opposition to fair value measurements.
  • Three generally reliable advocates for investors.

If you haven’t already guessed which way the vote went, I’ll give you a hint: the three investor advocates dissented.

Knowing that the private company guy is the swing vote on fair value accounting policies affecting public companies is profoundly disturbing.  What is he doing on the FASB anyway? It is a puzzlement, if not a dereliction of its duties, that the SEC can sit idly by as decisions on these momentous issues are buffeted by the single vote of someone who lacks public company chops, and whose reappointment will be decided by the issuer-dominated FAF.

Alas, I am sure that the SEC will not act, because its Chief Accountant is also a Big Four alumnus, even though it should be reacting to the lack of progress on bank loan accounting with great consternation.  It should direct the FAF to make things right forthwith, or suffer the consequences.

Moreover, the basis of conclusions section of this modest Update consists of 153 paragraphs, which by itself should tell you how the majority had to contort themselves like pretzels to justify what amounts to little more than chopped liver.  The dissents are much more interesting, and are most distinctive as expressions of frustration about how the majority is content to fiddle as the banks, along with the global economy, is set to go up in flames once again.

“…[T]he current mixed-measurement attribute model places too much emphasis on amortized cost… if limited to one measurement attribute … fair value [is preferred] because it better meets the objective of financial reporting…”

“…[T]he classification and measurement model prescribed by the amendments in this Update generally fails to meet the objective of financial reporting… . [and] the decision to retain existing classification and measurement guidance represents a significant lost opportunity to provide users with the information necessary to understand the potential risks in financial instruments that have caused significant issues in past economic crises.”  [emphasis added]

* * * * * * *

US GAAP would be much better without nearly all of the standards that were passed by a one-vote margin. Notwithstanding, the reason why we even have an FASB is because its predecessors (the CAP and APB) were dominated for 35 long years by the large accounting firms, whose business interests were too closely tied to special interests.

The FASB has been setting accounting standards for public companies for the last 42 years.  It was supposed to be more effective than its predecessors because its members would be full-time standard setters, who were paid enough so that they should want to remain independent.  ASU 2016-01 is just the latest proof that the FASB has consistently failed to live up to those expectations.

It is time — before it is too late once again — for the SEC to step up to the plate, to finally make the FASB into what it was supposed to be in the first place. At the very least,  the Financial Accounting Foundation must forfeit its privilege to appoint FASB members.


  1. Reply Jeffrey Schultz, CPA January 23, 2016

    Just found your site today. Going to bookmark. I appreciate the skeptical approach and hope that other posts are similar in that perspective


  2. Reply Randi February 1, 2016

    how do you feel we should fix the accounting by the banks?

  3. Reply Michael November 29, 2017

    The new loan loss standard was actually a separate project that was finalized a few months later. Would be interested to hear your take on that standard given that it requires a Day 1 loss for the lifetime expectation of credit losses – that generally would not happen in a FV world.

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