FASB May Delay Rule Change on Debt Securities

The Financial Accounting Standards Board (FASB) may delay a rule change that would require financial institutions to reduce the value of debt in their bond holdings when interest rates fluctuate.

The proposal would force banks and financial institutions to record declines in the value of mortgage-backed securities in their income statements even if the losses are caused only by rising interest rates rather than falling credit quality, the Wall Street Journal reported.

The proposed requirement is part of a group of guidelines called EITF 03-1, which are designed to clarify when companies must book losses in their equity and debt portfolios.

The impact of the rule could be far-reaching, as interest rates are expected to rise and about $5.3 trillion in mortgage-backed securities are held by banks, life insurance companies and others, according to the Bond Market Association.

Donna Fisher, the director of tax and accounting at the American Bankers Association, told the Wall Street Journal: "What is the logic on writing down a triple-A bond just because of a rise in interest rates?" The group is backed by the finance chiefs at more than 180 banks, all seeking more debate and a delay on implementation.

Freddie Mac, the second-biggest source of U.S. mortgage funds, also asked FASB to rethink the new rule, which would force it to reduce the value of most of its $656 billion portfolio of mortgage securities because of swings in interest rates.

According to Reuters, the rule applies mainly to securities that are “available for sale.” Observers say that the change could slow mortgage bonds trading. Kevin Jackson, senior mortgage strategist at RBC Dain Rauscher in Chicago, said some banks are already reducing their trading due to uncertainty about the rule.

The staff of the accounting rule-maker is expected on Wednesday to recommend additional guidance, more comment time for companies and a delay of the provision on booking losses in debt securities caused by interest rate changes.

The rest of the EITF 03-1 guidelines, including the provisions related to equity holdings, will go into effect as planned.

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