What can we do about financial instruments disclosures?

• Author: Mackey, Richard D.
• Position: Corporate Reporting

What can we do about financial instruments disclosures?

Dear Jim:

Thanks for sending me the FASB exposure draft on "Disclosures on Market Value of Financial Instruments." I have reviewed it several times, and have concluded that the ED creates more problems than it solves. It seems to me that the FASB doesn't understand the environment in which community banks, and other small businesses, operate. So I'd like to tell you what problems we will have should the draft become a "generally accepted accounting principle."

Because the issues are so complex, I'll limit my discussion to the liability side of the balance sheet.

Published market prices not available

The ED defines (paragraph 5, page 2) the market value of a financial instrument as "the product of the number of trading units of the instrument times the market price - the amount at which a single trading unit of the instrument could be exchanged in a current transaction between a willing buyer and a willing seller, other than in a forced liquidation sale." But what is a "trading unit" as it relates to deposits, especially to demand deposits, and to core repurchase agreements? And where do we get a market price for a trading unit? I have never seen a published market price for either actual sale transactions or a bid/ask quote estimate as defined by the ED.

The definition assumes that transactions are between a willing buyer and a willing seller, which implies a national market. If this is so, would we be able to select and use the most favorable indexes applicable in any area in the United States? And can we use a different local, statewide, regional, or national index each year as we assess the values and merits of each index?

The size of the market is critical. Even though Lake City is a relatively small community bank of only $300 million in assets, some of our offices are in direct competition with both of the largest financial institutions in Indiana and with large regional holding companies ranked among the largest financial institutions in the United States. Surely the FASB would not require a small community bank to use an index less favorable than the one used by its direct competitors!

Where is the |most active market'?

The ED also states (paragraph 6, page 2) that "the quoted price for a single traded unit in the most active market provides useful information to investors, creditors, and others, and is the basis for determining market price and reporting market value." But where is the "most active market" for the valuation of deposits and core repurchase agreements?

The Resolution Trust Corporation is having a tough time selling deposits, according to reports in a number of business and trade publications. If a national organization such as the RTC can't find a viable national market for the sale of deposits and core repurchase agreements, why does the FASB assume that a small community bank in a non-metropolitan area has the skills and resources necessary to identify national markets and a national value, especially when the FASB expects valuations to exclude all related intangibles normally associated with depository accounts and core repurchase agreements?

The ED also states (in paragraph 11, page 3) that "[i]f quoted market prices are not available, management's best estimate of market values may be based on the quoted market price of a financial instrument with similar characteristics or on valuation techniques (for example, the present value of estimated future cash flows using a discount rate commensurate with risks...