Mark 2 Market Possibly Getting More Leeway

Fasb getting reviewed

The Financial Accounting Standards Board, which sets U.S. accounting rules, proposed Monday to allow companies to exercise more judgment in determining if a market for an asset is active and if a transaction is “distressed.”

FASB put the proposals out for comment, with the hope of having the mark-to-market accounting guidance approved in time for companies to use it when preparing their first-quarter financial reports.

Board members said the guidance could help boost fair values, or mark-to-market values, and get investors more interested in U.S. banks.

Some U.S. banks and lawmakers have urged regulators to ease mark-to-market accounting rules that have triggered billions of dollars in writedowns and have been blamed by some for impeding the economic recovery effort.

But investors are concerned that relaxing accounting standards could lead to financial manipulation and less reliable information in company reports.

U.S. lawmakers last Thursday pressured FASB to deliver new guidance on mark-to-market accounting within three weeks, or face legislation to relax the rules.

Hundred Dollar
Bill Haber / AP

FASB Chairman Robert Herz said at a board meeting on Monday that he hopes the guidance will empower companies to use more judgment in determining the fair value of an asset. He said companies are supposed to value the assets as if it were sold in an orderly market, instead of using a fire-sale price.

“We’ll see whether this helps or not,” Herz said. “In the end, part of the problem here is we have a kind of messed-up situation underlying this.”

He said there is currently a presumption that if a company cannot prove that a market is distressed, it has to use the price from a recent transaction, which — more often than not — has been depressed.

The guidance would flip that presumption, and let companies value an asset by using more information than just the price at which a similar asset was sold in a distressed or forced transaction.

FASB board members said they are simply clarifying the latitude that already exists in fair value accounting standards. But they said current market conditions have forced the board to consider public policy when issuing guidance.

“What we’re voting on right now is hopefully elevating those fair values to a reasonable point so investors are more interested in investing in the banking system,” one board member said.

The proposed guidance will have a 15-day comment period with the hope of issuing the guidance in the first week of April.