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What company couldn’t use an extra $46 million these days to boost the bottom line?

That’s the benefit Principal Financial Group Inc. recently gained by applying new accounting rules designed to better reflect investment-related losses.

Companies both big and small that had investment losses will have a big challenge ahead of them in applying new accounting guidance pertaining to credit-related losses. However, the additional number crunching could enable some of them to reverse investment-related losses they have already incurred, according to experts at the Des Moines office of McGladrey & Pullen LLP.

On April 2, the Financial Accounting Standards Board (FASB) issued new staff opinions, among them a change to fair market accounting rules (Financial Accounting Standard (FAS) 157) designed to give companies holding illiquid investment securities more leeway in determining whether the assets must be written off under “mark to market” rules.

Other changes address how banks and other companies that have sustained credit-related investment losses account for them. Those changes (FAS 115-2 and FAS 124-2), which provide guidance for how other-than-temporary impairments to assets are handled, could bolster some financial institutions’ earnings, said Jeff Baker and Mike Lundberg, partners at the McGladrey accounting firm. “For some banks it may not mean anything at all; for others it may be very meaningful,” Baker said. The rules will be effective for the reporting period that ends June 30, though companies may opt to adopt the rules effective for the quarter that ended March 31.

Large banks and other major financial institutions such as insurance companies are more likely to have invested in complex instruments most affected by credit-related losses, Lundberg said. “On the other hand, I think we see it throughout our client base, that even some of the smaller community banks have some exposure to these instruments,” he said.

No significant damage

Tom Gronstal, Iowa’s banking superintendent, said only a handful of state-chartered banks will be affected by the rule changes.

“We have a few banks that have some corporate securities that will have to make some adjustments,” he said. “But for the most part, the state-chartered banks don’t have much effect from that area. I don’t think any of them will see anything drastic. It will make some slight changes in their overall picture, but it’s not going to have a significant effect on their financial condition. We really haven’t seen significant damage from the old rules.”

Under the old rules, Lundberg said, “once you determined you had an other-than-temporary impairment, all of that was taken as a charge to earnings on the income statement. Now, with the rule change, you split that into a credit-related component and an ‘other’ component. The credit-related component goes through the income statement while the other component doesn’t, so the impact will be that banks or other entities will report both higher earnings and generally higher reserve capital as a result of this rule change.”

Unlike the mark to market rule, which cannot be applied to losses already sustained, companies will be able to apply the revised other-than-temporary impairment rule retroactively to previous quarters, he said.

Institutions that expect to benefit from the change may want to apply the rule for the first quarter, though there is some value to waiting to see how other companies handle it, Baker said. “This is a big challenge, particularly on some of the more complex asset-backed securities, determining the credit component of that loss. It’s very complicated,” he said.

Most adopting early

Principal, which reported its first-quarter earnings earlier this month, opted for early adoption of the new rules, said Terry Lillis, the company’s chief financial officer.

“We went ahead and said it made sense for us because we’ve identified (the impairments),” Lillis said. “I think you’ll see the majority of companies around the country are early-adopting, because it’s a change they’ll have to make anyway.”

Under the new rules, Principal recorded total other-than-temporary impairment losses of $146.6 million, but was able to split out nearly $51 million of that amount, or $28.5 million after taxes and deferred acquisition costs, of losses that were not credit-related.

“Had we not adopted early, these (noncredit) losses would have run through the income statement and resulted in an increased loss of $28.5 million,” Lillis said.

Going back to previous quarters, Principal also identified approximately $17.5 million in investment losses that it was able to recategorize because of the new rules, Lillis said. “So (the rule change) did not have very much of an impact on us,” he said. “The reason we are not as affected by this is our ability and intent to hold these assets. Our liability structure is such that we have longer-term, well-defined liabilities, so we are not forced to sell in a distressed environment.”

While the revised rules on other-than-temporary impairments are doing what they were intended to do, the mark to market rule change wasn’t as helpful as he had hoped it would be, Lillis said.

“At one time the thought process was that there would be an opportunity to determine the values (of assets) in a distressed environment and revalue them,” he said. “FASB came out and said, ‘We really aren’t going to change things.’ so we basically had no change.

“Mark to market, I think, is still going to have to be addressed to get to the fair market value of investments,” Lillis said. “It is complicated, and I felt it was going to be a lot more meaningful as we watched it unfold in the March time period.”

Wells Fargo & Co., which also adopted the rules early, wrote down its securities portfolio by $516 million in other-than-temporary impairments in the first quarter. The effect of the accounting change was that it didn’t have to apply the non-credit-related portion of those unrealized losses – $334 million – to earnings.

Additionally, Wells Fargo officials said the mark to market rule changes under FAS 157 had no material impact on the company’s first-quarter earnings, though it resulted in a $2.8 billion improvement in other comprehensive income.

“The improvement in unrealized loss driven by FAS 157 impacted equity, not earnings,” said Jason Menke, a spokesman for the company, “Trading results of $18 million from the application of FAS 157 did go through earnings, and are not deemed material.”

Baker said that as the economy improves, the impact of the rule changes will be less dramatic overall.

“In more normal times, it wouldn’t have the impact it has today,” he said. “I think the important thing is that they do a thoughtful analysis and have documentation they can show regulators to support the numbers they use.”