WASHINGTON (10/1/08)—The Federal Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC) yesterday provided clarity for U.S. entities--including credit unions--forced to record lower fair market values for some assets on their balance sheets. According to Scott Waite, chair of the Credit Union National Association’s (CUNA) Accounting Task Force, the current Fair Value Measurement (FAS 157) already provides for a hierarchy to determine a financial instrument’s price, but Tuesday’s FASB and SEC statement provides accounting guidance urged by many in the financial services industry, including CUNA. The highest, or first, level in assigning a value to an asset is the “observable market price in an orderly transaction between willing market participants,” said Waite, who also is senior vice president and chief financial officer at Patelco CU in San Francisco. Absent this condition, the next two levels can be used to determine the fair value price--one of those is cash flows. “If a price for a security is depressed because of a lack of interested buyers, but is still performing and paying interest, its cash flows generated can be used to adjust the price upward for accounting purposes,” he explained. Waite explained these aspects of applying fair value are contained in the standard issued last year, but today’s clarification by the SEC and FASB reinforces their existence and acceptable use. “In Tuesday’s inactive or illiquid markets, it’s difficult to rely on the first level of fair value measurement,” he said. For credit unions, this means some relief for many who hold mortgage-backed securities, which in today’s market have depressed prices, according to Waite. Assuming a drop in price has occurred, the difference an entity pays for a security and today’s market value is classified as an “unrealized investment loss”. The resulting financial transaction decreases equity on the balance sheets. “This not only seems alarming to some, but gives the false appearance that real investment losses might have to be ultimately realized through earnings,” said Waite. “The affect of this guidance will allow credit unions to revisit the fair value and potentially improve or increase their equity by reversing some of this negative effect,” said Waite. "However, if a credit union has already been using the illiquid or inactive market defense with their accountants, then some may see little change." "But for those who might just now be thinking of that strategy, I think they may just find some relief and an opportunity for some improvement," he added. Waite pointed out that to the degree that equity positions improve for financial institutions, they may gain more latitude--from regulators and rating agencies--and confidence in supplying more credit to borrowers. "That's where I see some potential for increase liquidity," he said.