America's bankers are heaving a heavy sigh of relief after the Financial Accounting Standards Board tentatively decided it will not require them to book loans held to maturity at fair value.

Pulling up on a full-court press for fair value for all financial assets and liabilities, FASB has decided instead it will create three categories of financial assets, each to be measured and recorded in financial statements a little differently. The three categories reflect differences in how entities manage those assets, such as whether they are meant to be sold or held to maturity.

The first category is for financial assets where an entity is holding assets for sale and actively trading them. For those assets, FASB will require entities to measure them at fair value and record any changes through net income. The next grouping is for financial assets that are considered investments with a focus on minimizing risk and maximizing return. Those assets would be measured at fair value, with any changes recorded through “other comprehensive income,” which means they affect equity on the balance sheet rather than net income on the income statement.

The final category focuses on financial assets where an entity plans to manage the asset and collect the cash flow it generates, such as loans that are not securitized but instead are held to maturity. Those assets would be measured at amortized cost, meaning they are booked at cost and written down each period as the loan is settled over time.

In a Webcast to update FASB activities, Chairman Leslie Seidman said she expects the criteria that are eventually hammered out for each category to make it clear that amortized cost will not be possible for actively traded securities. She expects amortized cost to be available only “where an entity has a relationship with a borrower and the purpose of the relationship is to advance funds and be repaid by the collection of cash flow and interest,” she said. “We wouldn't expect securities traded in an active market to qualify for this.”

In addition to specifying the criteria for each category of financial assets, the board has other issues to resolve, such as how to recognize gains and losses for instruments recognized through OCI and what to do about loans booked at amortized cost that eventually end up being sold because the entity had a change of heart about its long-term strategy.

The board also needs to work out whether the change is significant enough from its original proposal to require a new draft for public comment. “It's premature to talk about whether we need to re-expose,” Seidman said. “We need to come to conclusions about the changes we want to make to what we exposed, then evaluate how significant the differences are from what we exposed and the existing rules.”

FASB's original proposal called for fair value for all financial assets and liabilities, leading to an avalanche of comment letters and a full line-up at global roundtables protesting the principle. FASB indicated at a board meeting in December it was open to considering a different approach and tasked its staff to offer up some ideas. The International Accounting Standards Board is working on a related package of rules as part of the two boards' efforts to converge U.S. and global accounting standards, and its proposal already included a provision for loans that would be held to maturity.

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