The imminent US backtrack on mark-to-market accounting is bad policy at a bad time. The Financial Accounting Standards Board’s hurried rule changes for reporting financial asset values look like a rush job under bank-led political pressure. It will also confuse investors – the group supposed to benefit from accounting standards – at an already volatile moment.
Many politicians and pundits blame fair value accounting rules – also often called mark-to-market rules – for worsening the current crisis. Attaching distressed market values rather than a higher historical cost or long-term recovery value to financial assets, they say, has caused financial institutions’ capital cushions, as reported to investors, to collapse – unnecessarily overstating the risk of insolvency.
But if a financial firm holds securities specifically for sale or in a liquid trading book, and funds itself partly or mainly with short-term borrowing, what do investors need to know? Pretty obviously, roughly what the securities would fetch if sold. Supporters of a fairly strict mark-to-market approach say its critics are blaming the messenger for problems of financial firms’ own making.
Now FASB appears to be caving under political pressure, at least to a point. Its proposed rules would give financial companies’ bosses and auditors more discretion to ignore actual market transactions as valuation benchmarks – instead using computer models or other methods to arrive at a value.
Public comments are due, perhaps fittingly, by April Fool’s Day, with FASB’s board set to meet the next day. The new rules,
if approved, would apply to financial reports for the quarter ending on Tuesday. It’s a measure of the proposals' popularity with many of those affected by markdowns on illiquid assets that plenty of responses from financial firms actually suggest backdating the rules to the end of last year – even if that means restating accounts.
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Some think differently. Goldman Sachs, for instance, has been a supporter of mark-to-market. Deutsche Bank, in its comments to FASB, said it didn’t think the proposed changes would improve financial reporting or investor confidence, and highlighted inconsistencies and practical difficulties – not to mention the fact that they would widen the gap between US and international accounting standards, when convergence is supposed to be the objective. And the Securities Industry and Financial Markets Association warned of “unintended consequences”.
The timing, moreover, is troubling in three ways. First, its proximity to the grilling the FASB chairman received in Congress earlier this month; second, the short time given for discussion and debate; and finally, the possibility of financial institutions suddenly being able to paint a rosier picture of their balance sheets in the midst of an already volatile period. Overall it seems like a recipe for weakening, not boosting,