FASB Change

Based on the belief that it is important to go to primary sources, here it is for today's FASB board meeting.

All I will say is that it is complicated and defies summarization.

It clarifies what constitutes an orderly market.

It discusses how to measure and account for OTTI (other than temporary impairment).  As complex as this is, don't forget that the income has two components in GAAP -- Income and OCI or Other Comprehensive Income.  A huge amount of effort goes into this distinction that is important in theory but much less so in practice.  OCI hits the balance sheet.  I am a balance sheet type and don't really care so much for this single, arbitrary distinction.  

At the March 16, 2009 meeting, Chairman Herz announced that the FASB also would address other-than-temporary impairment issues, in conjunction with the project intended to improve the application guidance used to determine fair values under Statement 157. Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b on other-than-temporary impairments (OTTI) is intended to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to more effectively communicate when an OTTI event has occurred. As proposed, the FSP would apply to both debt and equity securities. The proposed FSP requires separate display of losses related to credit deterioration and losses related to other market factors on the income statement. Market-related losses would be recorded in other comprehensive income if it is not likely that the investor will have to sell the security prior to recovery.

What this means is that a debt security (CDO, for example) can lose value due to either expected credit losses OR other factors including liquidity preferences, market or presumed market changes, etc. The non credit components would be amortized over the remaining life of the instrument.  This goes into a new bucket in the OCI statement:

The proposed FSP would result in a new category within other comprehensive income for the portion of the other-than-temporary impairment that is unrelated to credit losses for held-to-maturity securities.

This is similar to the treatment of unrealized capital gains(losses) in the income statement.  Presumably, the decision that more securities aren't valued based on orderly markets means that the details of how to account for changes in model valuation are now more important.  Hence the linking to OCI and OTTI.

OTTI has to hit regular income.  If a firm intends and has the ability to hold a security to maturity, then the market impairment that is not credit related does not go into OTTI but into this new bucket of OCI.  

Confused?  I'm sure that the intent is to exclude the non credit based piece from regulatory capital requirements.