National Bank Appeals Process:
Appeal of Early Adoption of the Statement of Financial Accounting Standards No. 159 (First Quarter 2008)

Background

A community bank appealed to the Ombudsman their supervisory office's determination that its early adoption of the Financial Accounting Standards Board's "Statement of Financial Accounting Standards No. 159-The Fair Value Option for Financial Assets and Financial Liabilities" (February 2007) (FASB Statement No. 159) was not substantive. The board was requested to reverse adjustments to retained earnings and to re-file their March and June 2007 call report data.

Discussion

The appeal indicates the board adopted FASB Statement No. 159 on April 10, 2007, and that, based on information available at the time, and after consulting with their CPA, the board voted to sell low-yielding investments and replace them with higher-yielding investments using the fair value option of FASB Statement No. 159. The appeal also indicates the OCC supervisory office's findings and request defeat the board's intention of using the fair value option provided in FAS 159.

The supervisory office determined the board and management applied the fair value option only to below-market-value securities, liquidated the securities, and then reinvested in higher-yielding assets. The board and management applied the option only to the initial securities and did not subsequently choose the fair value option on newly purchased or existing assets. The totality of these actions indicated the early adoption of FASB Statement No. 159 was done to achieve an accounting result, rather than the intent to use the fair value option as a measurement attribute on an on-going basis.

FASB Statement No. 159 is a principles-based accounting issuance, versus a rules-based issuance, in which institutions are expected to comply with the outlined principles and objectives of the issuance. The objectives of FAS 159 are to promote financial reporting transparency, to reduce the complexity of fair value reporting as it relates to complex hedging activities, and to promote fair valuing of assets and liabilities on an on-going basis.

The board's and management's actions in choosing a one-time fair value option transaction with no subsequent fair value option activities reflects the intent to achieve an accounting result and is inconsistent with the FASB Statement No. 159 objectives of (1) promoting financial statement transparency and (2) continuing to choose the fair value option on an on-going basis.

Conclusion

The Ombudsman's office conducted a comprehensive review of the information submitted by the bank as well as the supervisory office. In addition to reviewing FASB Statement No. 159 and all available OCC guidance, the office also reviewed the American Institute of Certified Public Accountants' Center for Audit Quality Alert #2007-14 (April 17, 2007), regarding questions raised about the early adoption of FASB Statement No. 159.

The Ombudsman concluded the OCC supervisory office's findings were appropriate. The transactions as well as management's comments reflected the lack of intent to use the fair value option on those assets on an on-going basis and do not meet the principles-based nature and objectives of FASB Statement No. 159. The stay granted at the appeal initiation was lifted. Management was instructed to contact their supervisory regarding amendment of all necessary call report submissions.

The Ombudsman's conclusion was based on the specific facts and circumstances of this particular appeal and was not intended to be a broad conclusion regarding all cases involving early adoption of FASB Statement No. 159.