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Appeal of Early Adoption of the Statement of Financial Accounting Standards No. 159 (Fourth Quarter 2007)


A community bank appealed to the Ombudsman the decision by their OCC supervisory office 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 OCC supervisory office requested that the bank management reverse their entries to retained earnings and to restate their affected call report data.


In the appeal, the board and management stated that they believed they had adopted FASB Statement No. 159 and met all the supervisory expectations. The board and management cited the following reasons:

  • They chose an early adoption of FASB Statement No. 159 to reduce earnings and capital volatility, address asset/liability management issues, address balance sheet structure, and to sustain liquidity
  • They were realigning their portfolio to meet business and financial objectives
  • They performed appropriate due diligence and research and relied on third-party consultations, assessments, and reports in adopting FASB Statement No. 159, and
  • They expressed concern regarding the absence of substantive FASB Statement No. 159 guidance prior to their early adoption of it in valuing certain volatile assets.

The supervisory office concurred with management's comments regarding the actions they took. They also indicated the bank identified assets for which they elected to use the fair value option, liquidated those assets, and did not subsequently elect to use the fair value option for any new or replacement assets or liabilities.

FASB Statement No. 159 is a principles-based issuance, versus a rules-based issuance, in which institutions are expected to comply with the outlined principles and objectives. The objectives of FASB Statement No. 159 are to promote financial reporting transparency, to reduce the complexity of fair value reporting particularly as it relates to complex hedging activities, and to promote the use of the fair value option for measuring assets and liabilities in the future. The OCC, the Securities and Exchange Commission, and the Center for Audit Quality issued guidelines and alerts regarding early adoption of FASB Statement No. 159 and emphasized their expectations, particularly regarding electing the fair value option on an ongoing basis and specifying types of unacceptable transactions. The board's and management's actions were inconsistent with two primary objectives of FASB Statement No. 159, namely: (1) promoting financial statement transparency and (2) electing to use the fair value option for certain financial assets or liabilities on an on-going basis.


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 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 that the OCC supervisory office's findings were appropriate. The bank had repositioned their investment portfolio; however, the totality of the bank's actions did not reflect the intent to elect the fair value option with respect to these assets on an on-going basis. The bank therefore has not "substantively" adopted FASB Statement No. 159 and all affected call report data needed to be restated, as directed.

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.