FASB Changes Fair-Value, Mark-to-Market Accounting Standards

In a move that has been pushed for by companies like Citigroup and Wells Fargo, the Financial Accounting Standards Board has voted to relax fair-value rules, as reported today by Ian Katz and Bloomberg.com.

According to the article on the FASB changes to mark-to-market accounting:

The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more. FASB voted 3-2 to approve the rules at a meeting today in Norwalk, Connecticut.

“Congress clearly indicated that some easing was probably appropriate in this instance,” House Democratic Leader Steny Hoyer of Maryland said today in a Bloomberg Television interview.

House Financial Services Committee members pressed FASB Chairman Robert Herz at a March 12 hearing to revise fair-value, which requires banks to mark assets each quarter to reflect market prices, saying the rule unfairly punished financial companies. FASB’s proposals, made four days later, spurred criticism from investor advocates and accounting-industry groups, which say fair-value forces companies to disclose their true financial health.

A few other key notes about the FASB changes to mark-to-market rules:

• The Investors’ Working Group, a non-partisan panel headed by former SEC chairman Arthur Levitt, is among many who have criticized the FASB changes to fair-value reporting rules.  FASB responded to the criticism by saying that its intent was not to “change the objective fair-value measurement.”  Levitt and his group are concerned that FASB has apparently succumbed to political pressure.
• According to sources cited by Bloomberg, the result of the mark-to-market changes by FASB are that companies such as Citigroup could cut losses by an estimated 50-70% by reducing the toxic weight of mortgage-backed securities.  Bank industry earnings overall could increase by 20% as a result of the FASB changes.
• FASB is not allowing banks to retroactively apply the new fair-value standards to 2008 financial statements.  However, the new standards officially take effect at the end of June, and can be applied to Q1 financials.

Other related links on today’s announcement of fair-value changes by FASB:

U.S. audit watchdog studies mark-to-market changes — (Reuters)

Mark-to-market changes may have muted impact on banks — (Wall Street Journal)

FASB mark-to-market change and PPIP — (US News and World Report)

Mark-to-market change might be nonevent for stocks — (Market Watch)

Tags: acounting standards, fair-value accounting, fasb, mark-to-market