TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
On October 31, 1996, the Federal Financial Institutions Examination
Council ("FFIEC") issued the attached policy regarding regulatory reporting
requirements for debt and equity securities. The policy reiterates existing
regulatory reporting requirements that specify that the accounting for debt and
equity securities by banking organizations should be in accordance with generally
accepted accounting principles, as set forth in FASB Statement No. 115.
The policy clarifies that the classification of securities as substandard,
doubtful, or loss is not intended to establish accounting policy and reporting
treatment for securities. However, examiners should continue to consider existing
classification standards when computing classified asset ratios and assessing the
capital adequacy of a bank.
Any questions regarding this policy should be directed to Charles H.
Holm at (202) 452-3502.
Deputy Director
October 31, 1996
SUBJECT:Regulatory reporting requirements for investments in debt and equity
securities
BACKGROUND
The Federal banking agencies and the Conference of State Bank Supervisors issued the
Uniform Agreement of the Classification of Assets and Appraisal of Securities Held by
Banks," ("the Uniform Agreement") in 19381
to provide examiners with guidelines for
classifying assets and appraising securities held by banks. The guidance established three
classification categories for securities: "Substandard," "Doubtful," and "Loss." It also
provided specific instructions about how to consider securities classified as "Doubtful,"
and "Loss" when computing the net sound capital of the bank.
Questions have been raised about whether the guidance in the Uniform Agreement is
consistent with the accounting requirements set forth in Financial Accounting Standard
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," (FAS 115).
Accordingly, this announcement clarifies the regulatory reporting requirements for
investments in debt and equity securities.
GUIDANCE
Banks should follow generally accepted accounting principles, as specified in FAS 115,
when reporting investments in debt and equity securities in the Reports of Conditions
and Income ("Call Reports"). Accordingly, securities categorized as "trading" should be
reported at fair value with unrealized gains and losses recognized in current earnings.
"Available-for-sale" securities should be accounted for at fair value with unrealized gains
and losses recorded in a separate component of equity. Securities classified as "held-to-maturity" should be accounted for at amortized cost.
Under FAS 115, if a decline in fair value below the amortized cost of an available-for-sale or held-to-maturity security is other than temporary, the cost basis of the impaired
security should be written down to fair value. For example, if full collection of all
amounts due (principal and interest) is not expected on a debt security that was not
impaired at acquisition,an other than temporary impairment has occurred. The amount
of the write-down should be included in current earnings and would reduce regulatory
capital. (See FAS 115 for additional information about accounting for impairment of
securities.) The Uniform Agreement is not intended to establish accounting policy for securities. However, examiners should consider the classification standards and other guidance in the Uniform Agreement when computing classified asset ratios and when assessing the capital adequacy of a bank. Examiners should consult with the appropriate members of their agency's staff for additional guidance on applying the Uniform Agreement.
Footnotes 1. The Uniform Agreement was modified in 1949 and again in 1979. Return to text |
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