Mark-To-Market Rules Eased - A Good Change For Banks

The Financial Accounting Standards Board (FASB) today (Thursday) eased their guidelines on “mark-to-market” accounting, allowing companies to use their judgment in determining the “fair value” of their assets.

The revised rules will make it easier for companies to avoid having to take impairment charges on their investments against earnings.

The move comes after strong demand by the banks to relax the “mark-to-market” rules, which require companies companies to value assets at prices reflecting current market conditions. The changes will allow the assets to be valued as in an “orderly” sale, rather than a forced or “distressed” sale. The new guidelines will apply from 2Q09.

The banks have contended that during the current financial crisis, since the markets are not functioning smoothly, the rules have forced them to take big losses on the basis of market fluctuations that may be temporary.

We think that the rule change is good for banks like Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo & Co. (WFC), U.S. Bancorp (USB) in the short-term, as it enables them to hide the potential losses on their toxic securities. However, this will make the accurate valuations of companies’ assets very difficult, and in the long term it may drive away the investors due to doubts about the accuracies of their financial statements.

The revised guidelines also create a potential conflict with the Treasury’s plan for taking the toxic assets away from the banks’ balance sheets using the Public Private Investment Fund (PPIF). Under the new accounting rules, banks have incentive to keep the assets on their books, rather than selling them.

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Comment by thevoice@voicedup.com

2009-04-09 14:57:29

If not for the issuance of FAS157 effective November 15,2007 by the SEC and FASB . This rule requires banks to mark to market instead of mark to model as previously calculated since the inception of FASB. Pre FAS 157 when an investment vehicle trades thinly (such as mortgage backed securities) the underlying holder of the investment is allowed to use its own assumptions on fair value, today it must be valued based on what it can be sold at in the open market. If I’m a bank and expecting to receive future cash flow of $1000 a month over the next 30 years on an loan of 200K for a total payment of 360k, based on todays fair market value and panic in the market the underlying issue has been written down to 40 cents on the dollar or approximately 80k and this is a conservative figure.

In the current market it would not be wise to sell any of the troubled assets based on fair market valuation as there are not enough buyers which drastically reduces the price of the asset. This rule change with the mark to market update should slowly begin to bring back some credibility to this market.

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