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SEC guidance on fair value of perpetual preferred

  • SEC (US Securities and Exchange Commission) (dark gray) Image

15 Oct 2008

The Office of the Chief Accountant (OCA) of the US SEC has written to FASB Chairman Robert H Herz about how to assess declines in fair value for perpetual preferred securities (PPS).

US GAAP measures impairment differently for debt and equity instruments – some would say more rigorously for equity than for debt. The OCA notes that although PPS have 'debt-like characteristics', they are classified as equity because they are not redeemable. The letter states that:

OCA, after consultation with and concurrence of the FASB staff', has concluded that it would not object to an issuer, in assessing impairment of PPS, applying an impairment model (including an anticipated recovery period) similar to a debt security provided there has been no evidence of a deterioration in credit of the issuer (for example, a decline in the cash flows from holding the investment or a downgrade of the rating of the security below investment grade) until this matter can be addressed further by the FASB.

Concurrent with sending the letter, the SEC has asked the FASB to address this and related issues. Click to Download the SEC Letter (PDF 99k).

 

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