Accounting Rulemaker Proposes Use of Fair-Value Rule

After being pressured at a March 12 hearing by lawmakers to deliver new guidance on mark-to-market accounting rule within three weeks, or face legislation to relax the rule – The Financial Accounting Standards Board [FASB] Chairman Robert Herz, said on Monday his agency had agreed to allow companies to exercise “significant judgment” in valuing assets, and proposed permitting companies to apply the revised rule to their first-quarter financial statements.

The old fair-value rule required banks or companies to write down the value of certain assets to their current market value.

Chairman Herz said it hopes the guidance will empower companies to use more judgment in determining the fair value of an asset. He also said “companies are supposed to value the assets as if it were sold in an orderly market, instead of using a fire-sale price.”
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Some U.S. banks and lawmakers have urged regulators to ease mark-to-market accounting rules that have triggered billions of dollars in writedowns … But some investors are concerned that relaxing accounting standards could lead to financial manipulation and less reliable information in company reports.
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“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.” [Via Financial News]

FASB’s decision to relax mark-to-market accounting it’s a measure that could fix major problems at no cost. I think either suspension of, or targeted relief from the fair-value rule should have been exercised from the moment the first symptoms of the crisis appeared. When troubled financial institutions sell securities at fire-sale prices, it forces healthier institutions to slash the value of their own comparable securities. Those write-downs, particularly under the current financial climate – eventually erode investor confidence, forcing these firms to raise additional capital.

With a change in the accounting rule the U.S. accounting rulemaker hopes to boost fair values, avoid liquidity crisis and get investors more interested in U.S. banks.

The real effect of the newly applied guidance won’t be known for some time. The proposed rule will have a 15-day comment period with the hope of issuing the guidance in the first week of April.