MBA warns proposed FASB changes will increase complexity of derivatives accounting

The Mortgage Bankers Association (MBA) sent a letter yesterday to the Financial Accounting Standards Board (FASB), concerning proposed changes (download by clicking here) to derivatives instruments and hedging activities in the Generally Accepted Accounting Principles (GAAP) administered by the board. FASB’s Proposed Update would require all financial instruments to be carried at fair value in the balance sheet. Financial instruments for which the entity’s business strategy is to hold, for collection or payment of contractual cash flows, would be carried at fair value with any changes in fair value going to other comprehensive income. The MBA countered that this will “unnecessarily increase the complexity in financial statements that would adversely impact preparers, users and regulators.” In regards to the proposed changes, the FASB states that it believes that the proposed amendments would achieve the objective of developing common fair value measurement, disclosure and the understandability of these requirements under GAAP. But the MBA has several issues with the use of fair value. “Fair value is not the most relevant measurement for assets and liabilities for which the business strategy is to collect or pay contractual cash flows,” the MBA wrote. The trade group adds that amortized cost is a better reflection of expected cash flows. “MBA especially disagrees with the notion of including in the fair value of an entity’s liabilities the change in the entity’s own creditworthiness through earnings.” Furthermore, the proposed valuation process is neither fair value nor amortized cost; something the MBA also objects to. “MBA believes qualitative along with quantitative information is more user-friendly, which is why MBA believes the current balance sheet presentation along with robust footnote disclosures is preferable,” the letter concludes. The new guidance will be effective for fiscal years ending after December 15, 2010. FASB did not return requests to comment. Write to Jacob Gaffney.