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FASB Head: Mark-To-Market Relaxation Within Three Weeks

The head of the Financial Accounting Standards Board (FASB) -- which, along with the SEC, oversees corporate accounting -- told a House panel today that "in three weeks" his organization will issue new guidance on mark-to-market rules, allowing financial firms some flexibility in accounting for the toxic assets poisoning their balance sheets, the Associated Press is reporting.

Testifying before Rep. Paul Kanjorski's (D-Penn.) Capital Markets, Insurance and Government Sponsored Enterprises subcommittee, FASB chairman Robert Herz said that the new rules -- which had been promised by June -- could actually be delivered within three weeks.

Kanjorski pushed Herz to speed up issuance of the rules under the threat of new legislation. Kanjorski believes that financial firms need relief from strict mark-to-market accounting rules and was prepared to override FASB with a new law.

Simply put, mark-to-market accounting rules, enforced by the SEC and FASB, require a company to value -- or "mark" -- assets on its books based on the price they would bring if they were sold today.

In theory, mark-to-market provides good information for potential investors and prevents businesses from assigning any value they choose -- likely a higher one -- to things they own.

But mark-to-market can cripple businesses when no market for an asset exists, like now.

Some have called for the suspension of mark-to-market accounting to allow the big banks to get back on their feet but others argue against it, saying that killing the accounting rules would give companies incentive to create balance sheets that are pure fiction.

You can read Herz's full testimony here and FASB's press release on the testimony here.

-- Frank Ahrens
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By Frank Ahrens  |  March 12, 2009; 2:45 PM ET
Categories:  The Ticker  | Tags: Kanjorski, Robert Herz, mark to market  
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Oh No !!

Another opportunity to scam investors with unrealistic asset appraisals. Totally irresponsible.

Leave it to the Beltway crowd to fix things by making it worse.....cramming the square peg into a round hole.

Bad news. Very bad news. From a government that created this meltdown in the first place.

No wonder the market jumped today. Another "FIX" is on !!

Posted by: bandcyuk | March 12, 2009 4:28 PM | Report abuse

Devil's in the details. This could be very good news, getting financials realistically appraised, or very bad, overvaluing underwater institutions. Please get it right this time FASB.

Posted by: gshpc | March 12, 2009 6:43 PM | Report abuse

"Devil's in the details. This could be very good news, getting financials realistically appraised, or very bad, overvaluing underwater institutions. Please get it right this time FASB."

Posted by: gshpc | March 12, 2009 6:43 PM


Well said, gshpc. Time will tell whether or not this is a step in the right direction, but at least its not paralysis.

Posted by: lostinthemiddle | March 12, 2009 7:38 PM | Report abuse

In order to prevent hiding bad assets by overvaluing them, any asset which is not "marked to market" should be identified as such, and the amount of difference between the assigned value and actual market value should be indicated.
Ken Gallant

Posted by: keng | March 12, 2009 7:39 PM | Report abuse

That concept would make too much sense, Ken.

Besides, the identification of inflated M to M would destroy the distortion to speak.

No matter how we shake it up, it's still bad mojo for investors trying to assign value !!

But it's great for financial people trying to keep their jobs.

Posted by: bandcyuk | March 12, 2009 8:41 PM | Report abuse

bandcyuk said:

"No matter how we shake it up, it's still bad mojo for investors trying to assign value !!"

I'd argue that it is easier for investors to assign value based upon net present value of expected cash flows than on mark-to-market, especially in a market like this one.

Many investors won't touch banks right now b/c the mark-to-market values of assets keep leaping wildly down, seemingly decoupled from cash flow. Where these decreases in value impair regulatory capital, irregardless of cash flow, the unpredictability of the market makes it totally rational to stay away from the shares.

Cash flow is not "make believe", so why is marking to a value based on cash flow smeared as "mark to make-believe"? Given the importance of a stable banking system to our economy, i think that an accounting system that attenuates swings in regulatory capital (in both directions) is best for banks.

It doens't seem like an impossible task for the FASB could come up with some cash flow valuation guidelines that avoid the "Enron" situation (which was nowhere near as bad as today's situation). Likewise, Congress or the SEC could implement a safe-harbor for accountants who use such guidelines to avoid another Arthur Andersen situation, and thereby allow the accountants to exercise a little judgment in valuation.

Posted by: matt1030 | March 13, 2009 1:09 PM | Report abuse

Avoiding the "Enron situation" outside of mark-to-market: ignores the fact that Enron practiced mark-to-market valuation, but with energy futures. The bigger issue is leeway outside mark-to-market without the pitfalls of the discretionary valuation models that Enron employed within mark-to-market. We saw with Enron that mark-to-market is not flawless; let's face it, these derivatives pose inherent valuation difficulties and so in the end it's caveat emptor, caveat investor.

Posted by: Plutonium57 | March 13, 2009 2:29 PM | Report abuse

Fair value or M2M assigns the value of an asset to what it is trading at (Level 1).

The problem with this is that the price tends to be volatile and can be manipulated in an illiquid market resulting in potentially the wrong value being assigned to the asset.

Fair value needs to incorporate more than what the asset is trading at, at any point in time.
For assets that generate cash flow, a minimum value based in part on that cash flow should be incorporated in the determination of its value, regardless of what it is trading at.

That is not the case with Level 1, and that is the problem.

Posted by: Mr_Z | March 15, 2009 3:00 AM | Report abuse

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