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CUNA Regulatory Comment Call
March 12, 2007
Valuation Guidance for Financial Reporting
EXECUTIVE SUMMARY
- Through an Invitation to Comment (ITC), the Financial Accounting Standards Board (FASB) is asking for input regarding whether additional and more specific valuation guidance is needed in financial reporting as well as the process for developing that guidance. Currently, a number of organizations issue valuation standards. Those organizations issue valuation standards for a number of different classes of assets, including real property and business valuations. The valuation standards provide guidance on a wide range of issues, including professional practice issues, and the application of valuation techniques. FASB is requesting comments on whether valuation guidance is needed to determine a value that would satisfy a measurement attribute for financial reporting purposes.
- The ITC specifically asks for feedback concerning:
(1) The need, if any, for valuation guidance, including: related implementation guidance for financial reporting; the specificity of this valuation guidance; and the duration of standard-setting activities.
(2) Whether FASB should be solely responsible for providing valuation guidance or whether another organization should be involved.
(3) The process that should be used to issue valuation guidance for financial reporting.
- This ITC is of importance to the credit union industry in light of the forthcoming FASB final guidance on business combinations. That guidance will implement the FASB merger rule that eliminates the pooling-of- interests method of accounting for business combinations (simple combination of the balance sheets of the merging entities), the approach presently used in the majority of credit union mergers. Instead, the proposal requires the use of the purchase method of accounting (which FASB terms the acquisition method). Use of the acquisition method will require the acquiring credit union to measure and recognize the fair (market) value of the assets and liabilities of the acquired credit union at the acquisition date. In addition, the continuing credit union will have to assess any potential impairment of goodwill and intangible assets (annually at a minimum).
- The final FASB business combinations guidance is expected out in the second quarter of 2007. According to the FASB website, the Board plans to discuss the effective date of the final guidance in April. (Credit unions can continue to use the pooling-of-interests method until the new final guidance becomes effective.) While nothing is official until the FASB Board meets and makes a determination, at this point it appears that the effective date is likely to January 1, 2009.
- Any new valuation guidance FASB may eventually issue could have a significant impact in a merger on a continuing credit union’s balance sheet. FASB valuation guidance would provide standards for acceptable valuation methodology of the merging credit upon initial merger and periodic revaluation as required thereafter.
- In September 2006, FASB issued Statement (FAS) No. 157,
Fair Value Measurements, which provides financial reporting guidance for measuring assets and liabilities at fair value. Statement 157 defines fair value, establishes a framework for measuring fair value, and provides for expanded disclosures about fair value measurements. However, Statement 157 does not expand the use of fair value as the measurement attribute for financial reporting. Statement 157 provides some measurement guidance, but it does not address many specific valuation issues that preparers, auditors, and valuation professionals currently encounter. CUNA’s analysis of FAS 157 is at
http://www.cuna.org/reg_advocacy/member/analysis/fasb_092606.html.
- Comments are due to FASB by April 15, 2007. Please send your comments to CUNA by April 6,
2007. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Deputy General
Counsel Mary Dunn at
mdunn@cuna.com
or to Senior Regulatory Counsel Catherine Orr at
corr@cuna.com;
or mail them to Mary or Catherine in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania
Avenue, NW, 6th Floor - South Building, Washington, DC 20004. You may also contact us at
800-356-9655, ext. 6743, if you would like a copy of the Commission’s Comment Request, or you may
access it at the following Internet address:
http://www.fasb.org/draft/ITC_Val_Guide_for_Financial_Reporting.pdf
DISCUSSION OF THE INVITATION TO COMMENT
Need for Valuation Guidance
- Some believe there should be valuation guidance specifically for financial reporting purposes. Their argument is that while valuation guidance has been developed for purposes other than financial reporting, such as mortgage lending or tax matters, that guidance is not sufficient for financial reporting purposes. In addition, multiple sets of valuation standards exist that address, among other things, professional standards. Therefore, those standards are not sufficient to result in consistent financial reporting for particular fact patterns.
- On the other hand, others conclude that the current valuation guidance developed by the valuation community for other intended uses, while not completely harmonized, is sufficiently robust to determine a value that would satisfy the designated measurement attribute for financial reporting purposes. The current valuation guidance provides an adequate conceptual framework for an entity to determine the price or value for a particular asset or liability.
- Others disagree on the issue of specificity of any additional valuation guidance. Some believe that determining a value for a specific asset or liability largely depends on the facts of a particular transaction and that any guidance issued should be flexible to allow for a reasoned evaluation (CFO’s/CPA’s professional judgment) of a particular situation. Others believe that the current guidance is conceptual and is sufficient for financial reporting purposes. However, they believe that implementation valuation guidance for a specific fact pattern would be useful for specific classes of assets and liabilities when there is diversity in how the principles are being applied.
- Some believe that any valuation-guidance-setting activities should be subject to a limited duration. They believe that once principles are established, preparers, auditors, and regulators should be able to apply the principles to all relevant fact patterns. Once initial valuation guidance has been issued, the need for additional valuation guidance should be reevaluated at a later date to determine whether additional guidance is necessary. In contrast, others believe that a permanent process should be established to provide guidance as new issues continue to arise as financial reporting evolves.
Level of Participation By Existing Appraisal Organizations
- Many constituents acknowledge that, at some level, preparers, auditors, regulators, and investors must be involved in issuing valuation guidance. The issue is whether existing appraisal organizations should have a unique role in that process. Some potential roles for existing appraisal organizations could include (a) not having a unique role, (b) serving as an advisor to any standard setters, or (c) serving as the principal standard setter.
- Some constituents feel that individuals or organizations should not develop valuation guidance for financial reporting when they are the principal individuals or organizations applying the valuation guidance in the marketplace, as this creates a conflict of interest. However, other constituents believe that the existing appraisal organizations should serve as advisors to any standard setter that would be established because those organizations have very significant subject matter expertise that provides a better understanding of the issues. Still other constituents believe that the existing appraisal organizations should be the principal standard setter. They believe that those organizations are the most qualified to provide valuation guidance because of their experiences with establishing the value of assets and liabilities. They note that existing appraisal organizations already understand the conceptual and practice issues and believe an appropriate amount of oversight by the FASB will adequately address any concerns with a perceived conflict of interest.
Process for Issuing Valuation Guidance
- The ITC sets forth the following four potential processes that could be used to issue
valuation guidance:
(1) FASB could issue valuation guidance without assistance from any external individuals or organizations.
- Proponents of this approach maintain that FASB should be responsible for issuing valuation guidance because it already has the infrastructure in place to conduct standard-setting activities. Further, the guidance needed to satisfy the measurement attribute required by GAAP should be established using the existing financial reporting standard-setting process. The standard setter that specifies the measurement attribute is in the best position to provide guidance on how to determine the value required by that measurement attribute. As an independent organization, FASB would not be encumbered by a perceived conflict of interest in developing that guidance.
(2) FASB could issue valuation guidance with the assistance from resource groups for specific issues.
- Under this approach, a resource group of valuation professionals and other interested parties should be formed to provide recommendations on individual fact patterns to the FASB. Separate resource groups could be formed for different fact patterns or issues. The make-up of a resource group could be tailored to the specific asset or liability classes as issues evolve relating to those classes.
(3) FASB could issue valuation guidance with the assistance from an organization structured similar to the FASB’s Emerging Issues task Force (EITF).
- The EITF comprises representatives of the FASB’s constituents with expertise in financial reporting. Those experts help identify, discuss, and resolve financial reporting issues as those issues arise in practice. A similar organization could be formed to focus solely on addressing valuation guidance. The organization could include representatives from all interested parties, including FASB Board members, preparers, existing appraisal organizations, auditors, regulators, and investors. Similar to how it interacts with the EITF, the Board would ratify any consensuses reached by this organization. For more information on the EITF, please see the FASB website at: http://www.fasb.org/eitf/agenda.shtml.
(4) A separate permanent standard setter could issue valuation guidance under the oversight of the FASB and the Securities and Exchange Commission (SEC).
- Supporters of this option assert that this new standard setter should be independent and should be represented by all parties interested in establishing valuation guidance. A standard setter separate from the FASB, composed of members with an educational background and industry experience in performing valuations, would be better suited to establish conceptual and implementation guidance related to the determination of value in accordance with the applicable measurement attribute. However, FASB staff and the SEC staff should oversee the organization. That oversight could take various forms, including ratifying any consensus reached, being participating members of the standard setter, or being observers at the standard setter’s meetings.
International Convergence
- FASB and the International Accounting Standards Board (IASB) have taken a number of steps in recent years to converge existing accounting standards. However, the FASB and the IASB continue to maintain separate processes for issuing accounting standards, which at times can result in accounting standards that are not completely converged. Additionally, there are currently separate processes for addressing emerging accounting issues and the issuance of any related implementation guidance. Some constituents believe that the accounting standards are sufficiently converged or the issues that exist in valuing assets and liabilities are universal enough to permit issuing valuation guidance on an international basis. However, other constituents believe that valuation issues should be addressed on a U.S.-only basis with a goal of convergence along a similar timeline as that of the FASB and the IASB.
QUESTIONS CONCERNING THE REQUEST FOR COMMENTS
FASB specifically requests feedback on the questions below.
- Is there a need for valuation guidance specifically for financial reporting?
If no, please explain why not. Then please skip to question 4.
If yes, why do you believe such guidance is necessary (how would such guidance be useful)?
- How specific should the additional valuation be? Should valuation guidance include conceptual valuation guidance, detailed implementation valuation guidance, or some combination of both?
- What should be the duration of any valuation-guidance-setting activities?
Please explain if you prefer a limited duration or the establishment of a permanent process and why.
- What level of participation should existing appraisal organizations (preparers, auditors, regulators and investors) have in establishing valuation guidance for financial reporting? Should they have a unique role (such as an advisory role to FASB) or act as the principal standard-setter?
- What process should be used for issuing valuation guidance for financial reporting? Do you favor any of the four potential processes (mentioned above) that could be used to issue valuation guidance mentioned above? Or do you have another process to recommend?
- Should the process of valuation guidance be on an international or national level?
- Who should grant authority to issue the valuation guidance?
- What due process procedures should the standard-setter following in issuing valuation guidance?
- How should any other organization that issues valuation guidance be funded?
- Other comments?
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
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