The FASB today approved two staff positions intended to provide additional
guidance regarding mark-to-market accounting rules. The results of both
positions will be to reduce writedowns of financial assets.
The first provides interpretation of the definition of fair value when no market exists
for an asset. The position defines criteria which allow assets to be
marked-to-model when the market is inactive instead of valuing assets at
The second allows differentiation between asset impairments
due to credit loss and impairments due to other market factors. Credit
losses would still require a write-down which would hit earnings.
Market-related losses would, however, bypass the income statement and be
recorded in other comprehensive income.
Lawmakers pressured Robert Herz, FASB Chairman to act quickly when testifying before Congress mid-March. With only a fifteen day comment period, these changes
were adopted in time to be reflected in financial institutions’ first quarter
Supporters argue that the writedowns under mark-to-market rules are
procyclical, causing earnings decreases and damaging capital ratios.
Investors argue that under the change, financial statements lack
transparency. While the “toxic assets” remain the same, their value may be
This move calls into question the independence of the FASB. Only three months ago the SEC decided mark-to-market standards had not contributed to the economic crisis and should not be suspended. The FASB has sacrificed clarity to the investor to pander to lawmakers and financial institutions. Former SEC Chairman,
Christopher Cox put it this way, "Accounting standards aren't just another
financial rudder to be pulled when the economic ship drifts in the wrong
direction. Instead they are the rivets in the hull, and you risk the integrity
of the entire economy by removing them."
Friday, April 3, 2009
Changes in Mark-to-Market
The following is provided by my colleague, Martha LaBarge, Assistant Professor of Accountancy at Hope College. I have similar concerns that the current crisis will lead to a loss of independency of the Fed: