NEW YORK CITY-Taking an “if it ain’t broke, don’t fix it” approach, the CRE Finance Council gives a thumbs-down to proposed changes in the accounting treatment of derivative instruments, impairment modeling and hedging activities. “We believe that the current approach, which is based on an entity’s business strategy, works well and is not in need of major changes,” the council says in a comment letter to the Financial Accounting Standards Board.

In its Sept. 30 comment letter, signed by president Lisa Pendergast and CEO Dottie Cunningham, the council says it “strongly believes” that the FASB and International Accounting Standards Board should work together “to produce a single standard for the accounting for financial instruments that is based on the current ‘business model’ approach,” rather than the “two very different standards” they’re working toward. Further, the group says the FASB’s proposed changes “do not represent an improvement in financial reporting and that the costs of implementing them significantly outweigh any perceived benefits.”

Specifically, the finance council doesn’t agree with the FASB’s proposal to apply fair value to loans and other instruments that are intended to be held for realization of yield, on grounds that “fair value accounting would not appropriately reflect the entity’s business strategy in those instances. Further, we believe that fair value accounting actually detracts from our market participants’ focus on sustainability of operating cash flows.” Any changes to the current approach, according to the council, should be limited to modest tweaks of the impairment model.

Rather than making changes that it believes will muddy the waters, the council favors the currently used “mixed-measurement” model. This entails fair value reporting for instruments that are intended to be traded, and amortized cost reporting for instruments that a company intends to hold over the longer term. Examples of the latter would be loans that a company intends to hold for their contractual cash flows, or an entity’s own debt that it intends to settle at maturity. This, the council maintains is “superior in that it better reflects an entity’s underlying business and economic reasons for holding an instrument.”

The council’s FASB comments acknowledge that fair value information is useful when it comes to financial instruments, “it is not necessarily the primary consideration for many participants in the commercial real estate market when evaluating commercial mortgages that often are nonrecourse to the borrower. Rather, investors are focused primarily on the underlying collateral property’s future ability to generate positive cash flows.”

The FASB proposal in question, an accounting standards update for which the board issued an exposure draft May 26, is intended to provide more timely information on anticipated credit losses to financial statement users by removing the “probable” threshold for recognizing credit losses. The FASB says it seeks to better portray the results of asset-liability management activities at financial institutions. In the proposal, non-public entities with less than $1 billion in total consolidated assets would be allowed a four year deferral beyond the effective date from certain requirements relating to loans and core deposits.” Comments were due Sept. 30; the FASB is planning follow-up public hearings this month.