Colonial Bankshares, CIT Group Change Their Mind on Statement 159

Almost three months ago, the FASB issued Statement 159, “The Fair Value Option for Financial Assets and Financial Liabilities."Shrewd accounting arbitrage types spotted an opportunity: apply the option to underwater held-to-maturity securities or available-for-sale securities that had “other than temporary” impairments and take the writedown through beginning retained earnings. No notice need be given to investors in the income statement. Then, turn around and buy similar securities and put them on the balance sheet at a shiny new, improved basis - and don’t apply the fair value option to them.

Presto, change-o: the balance sheet has been purged of unsightly OTT impairments without recognizing them in income. Furthermore, the company has teed up future gains on the securities it purchased by establishing the lower cost basis.

As I've mentioned, at least one person at the SEC - Jim Kroeker - has found this kind of gimmickry to be - well, gimmicky.

Maybe in light of those views, a couple of companies have changed their minds about their initial adoption of the standard. On April 18, Colonial Bancshares (COBK) proudly announced the early implementation of Statement 159 and its companion, Statement 157, saying it would “provide Colonial with greater flexibility to extinguish high rate debt and to sell lower yielding assets which the Company anticipates will improve the Company’s profitability for 2007 and in future periods.” In its investor conference yesterday, the company announced the rescission of its earlier move, and took back $ .02 from its previously announced earnings. (See page 30 in the linked document.)

Likewise, CIT Group (CIT) had announced earnings on April 18 of $1.37; it changed its mind about the initial adoption and pulled $.36 out of the earnings when it reversed course.

Then there’s this news article by Emily Chasan of Reuters: the FASB might consider changes to Statement 159. From the article:

…FASB member Leslie Seidman said that if companies have not properly adopted FAS 159 and its companion fair value measurement standard known as FAS 157, they could be changed.

“It’s our hope that that’s a transition issue related to that scheme [the non-recognition of losses and portfolio repositioning],” Seidman said. “I’m poised to amend them if we need to.”

When Jim Kroeker gave his speech about Statement 159 last month, he might not have expected that he was the cop setting up the sobriety checkpoint on a busy stretch of financial highway. But he was, and it looks like it’s starting to have results.