UPDATE:FASB Plan To Allow Cos More Leeway Under Mark-To-Market
March 16 2009 - 4:57PM
Dow Jones News
Accounting rule-makers have proposed allowing companies to use
more leeway in valuing their assets under "mark-to-market"
accounting, a move that could ease balance-sheet pressures many
companies say they are feeling during the economic crisis.
The Financial Accounting Standards Board agreed Monday on
proposed guidance that would make it easier for companies to use
their own models, estimates and judgment in determining the "fair
value" of their assets.
Mark-to-market accounting requires companies to peg the value of
their assets to the ups and downs of the market. But many companies
have complained that the current rules haven't worked during the
financial crisis, which has distorted or frozen many markets. The
result has been big asset write-downs that have weakened their
balance sheets.
The new proposal clarifies and modifies when companies can find
that trading in an asset has occurred in an inactive market and
under distressed circumstances - an approach that FASB says will
require companies to exercise "significant judgment."
If companies find that to be the case, they can then use their
own valuation techniques in pricing the asset, instead of relying
on what they contend are market prices that are temporarily weighed
down and unnaturally low.
"The goal is to give more operational guidance" for using
mark-to-market rules, said Neal McGarity, an FASB spokesman.
The news helped prop up shares of financial companies with
distressed balance sheets for another day, which had been helped
over the last week by chatter over possible changes to
mark-to-market rules. Among the best performing stocks in Monday's
session were some of the larger banking names with Citigroup Inc.
(C) adding 31% to 2.33 and Bank of America Corp. (BAC) rising 7.3%
to 6.18
But while the FASB's action was welcomed by some investors, "it
doesn't go far enough," said Donna Fisher, senior vice president of
tax accounting and financial management at the American Bankers
Association.
Fisher said until guidelines address temporary impairment
charges, "you still have an inaccurate picture of capital. The
problem is that companies will be recording losses that are much
greater than the losses they will incur."
Still, other observers are concerned that allowing more
flexibility under the rules will result in inflated asset values on
balance sheets and less transparency for investors about companies'
true financial status.
Wayne Landsman, an accounting professor at the University of
North Carolina, said while there was nothing inherently wrong with
the steps the FASB is proposing, he worries it will give companies
too much latitude to value assets the way they want instead of how
they should be valued.
Companies "don't want to write the assets down to a number what
the markets are telling you they're worth," Landsman said.
FASB's proposal comes on the heels of a House subcommittee
hearing last week in which members of Congress blasted FASB and
regulators for not acting more quickly to issue guidance to ease
the application of mark-to-market rules. FASB Chairman Robert Herz
had promised at the hearing that final guidance would be issued
within weeks.
FASB plans a final vote on the proposal April 2, after a 15-day
public comment period. If enacted as planned, companies could use
the new guidance when issuing their first-quarter financial
statements.
-Michael Rapoport, Dow Jones Newswires; 201-938-5976;
michael.rapoport@dowjones.com
(Kejal Vyas contributed to this report.)