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Mark-To-Market / Fair Value Accounting - Culprit in the Crisis

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Valor Razonable - Reasonable Value - Mark-To-Market - Fair Value...ACCOUNTING was a major cause of the current crisis.  Here are some folks views... 
 
___________________________________________________
Mark to Market (Fair Value) Background
                           Information
                           
                           Established in 1993, and amended last November, the mark to market accounting
                           rule was intended to provide a snapshot of asset values during a less volatile
                           market. 
                           
                           In the last year, companies - forced to value or "mark" their assets to the
                           current market rate - were forced to write down their values to match the
                           slumping market. 
                           
                           Companies have seen their assets, such as mortgaged back securities, drop in
                           value overnight.  Forced to raise more credit, many companies have faced
                           insolvency. 
                           
                           On September 30, 2008 FASB issued a clarification statement, recommending that
                           auditors estimate values based on discounted cash flows and other measurements
                           to determine asset values.  In particular, the FASB ruling acknowledges that
                           mark to market accounting has disrupted normal pricing systems, just as Newt
                           Gingrich suggested in the days prior:
                           
                           "The results of disorderly transactions are not determinative when measuring
                           fair value. The concept of a fair value measurement assumes an orderly
                           transaction between market participants. An orderly transaction is one that
                           involves market participants that are willing to transact and allows for
                           adequate exposure to the market. Distressed or forced liquidation sales are
                           not orderly transactions, and thus the fact that a transaction is distressed
                           or forced should be considered when weighing the available evidence."
                           LIVE LINK: http://www.fasb.org/news/2008-FairValue.pdf
                           
                           Today, April 2, 2009, FASB issued a recommendation that when the market is not
                           functioning properly, firms may use more flexibility in applying mark to
                           market to value their assets. 
                           

 

© Lunamarina | Dreamstime.com  
 
FAIR VALUE: WHEN THE ENGINE OVERHEATS, DON'T BLAME THE OIL LIGHT
By Paul Cherry, past chair, of Canada's Accounting Standards Board (AcSB), and Ian Hague, principal, AcSB.

When your engine overheats, do you blame the oil light? That's the argument that continues to place responsibility for the current ? nancial crisis on fair value accounting standards. Fair value accounting, also referred to as mark-to-market accounting, requires companies to value assets as if they were to be sold by the owner in the open market. In the current economic climate, for a majority of companies the value of their assets is low or underwater.
The argument against fair value accounting goes like this: the markets are not always rational or perfect and exposing a corporation's books to the roller-coaster ups and downs doesn't capture a true picture of the value of all types of assets. The unusual spikes or troughs in market prices are unrepresentative of the true underlying value. Many bankers argue that some assets, such as mortgages, are not held for the purpose of reselling and that fair value accounting rules distort the value of these assets in a negative way. They say assets should be valued based on how they perform their intended function, not on the price they would sell for at a particular moment.
What's at risk is the very thing that an oil light provides: a glimpse into the thrumming machinery under the hood. Fair value is the best measure that allows investors and other market stakeholders to clearly understand the current health of a company and make decisions based on that understanding.
Investors making informed decisions need unbiased, up-to-date information, in particular about the amount, timing and uncertainty of future cash flows. Fair value is unaffected by when or how an asset was acquired, by who holds the asset or by the intended future use of the asset. It is not entity-specific and is not dependent on management's intentions. Fair values are comparable at any measurement date and they can be added together to produce a meaningful total...

Accountants Gain Courage to Stand Up to Bankers

Turns out America’s accounting poobahs have some fight in them after all.

Call them crazy, or maybe just brave. The Financial Accounting Standards Board is girding for another brawl with the banking industry over mark-to-market accounting. And this time, it’s the FASB that has come out swinging.

It was only last April that the FASB caved to congressional pressure by passing emergency rule changes so that banks and insurance companies could keep long-term losses from crummy debt securities off their income statements.

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month.

“They know they screwed up, and they took action to correct for it,” says Adam Hurwich, a partner at New York investment manager Jupiter Advisors LLC and a member of the FASB’s Investors Technical Advisory Committee. “The more pushback there’s going to be, the more their credibility is going to be established.”

Broad Consequences

The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan.

This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.

The board said financial instruments on the liabilities side of the balance sheet also would have to be recorded at fair-market values, though there could be exceptions for a company’s own debt or a bank’s customer deposits.

The FASB’s approach is tougher on banks than the path taken by the London-based International Accounting Standards Board, which last week issued a proposal that would let companies continue carrying many financial assets at historical cost, including loans and debt securities. The two boards are scheduled to meet tomorrow in London to discuss their contrasting plans.

Differing Treatment

While balance sheets might be simplified, income statements would acquire new complexities. Some gains and losses would count in net income. These would include changes in the values of all equity securities and almost all derivatives. Interest payments, dividends and credit losses would go in net, too, as would realized gains and losses. So would fluctuations in all debt instruments with derivatives embedded in their structures.

Other items, including fair-value fluctuations on certain loans and debt securities, would get steered to a section called comprehensive income, which would appear for the first time on the face of the income statement, below net income. Comprehensive income now appears on a company’s equity statement.

Another quirk is that the FASB doesn’t intend to require per-share figures for comprehensive income. Only net income would appear on a per-share basis. My guess is that means Wall Street securities analysts would be less likely to publish quarterly earnings estimates using comprehensive income.

Imagining the Impact

Think how the saga at CIT Group Inc. might have unfolded if loans already were being marked at market values. The commercial lender, which is struggling to stay out of bankruptcy, said in a footnote to its last annual report that its loans as of Dec. 31 were worth $8.3 billion less than its balance sheet showed. The difference was greater than CIT’s reported shareholder equity. That tells you the company probably was insolvent months ago, only its book value didn’t show it.

The debate over mark-to-market accounting is an ancient one. Many banks and insurers say market-value estimates often aren’t reliable and create misleading volatility in their numbers. Investors who prefer fair values for financial instruments say they are more useful, especially at providing early warnings of trouble in a company’s business.

‘Religious War’

“It’s been a religious war,” FASB member Marc Siegel said at last week’s board meeting. “And it’s been very, very clear to me that neither side is going to give, in any way.”

So, the board devised a way to let readers of a company’s balance sheet see alternative values for loans and various other financial instruments -- at cost, or fair value -- without having to search through footnotes. At last week’s meeting, FASB member Tom Linsmeier called this a “very useful approach that addresses both sets of those constituents’ concerns.”

This will not satisfy the banking lobby, which doesn’t want any significant expansion of fair-value accounting. “I guess the nicest thing I can say is it’s difficult to find the good in this,” Donna Fisher, the American Bankers Association’s tax and accounting director in Washington, told me.

If the bankers don’t like it, that’s probably a good sign the FASB is doing something right.

A new discussion paper released last week by the staff of the International Accounting Standards Board has revived an old, but still fiery fair-value controversy. At issue: the role of credit risk in measuring the fair value of a liability. According to the paper's opening statement: the topic has "arguably ... generated more comment and controversy than any other aspect of fair value measurement." When a company chooses to use the fair value method of accounting, it must mark its liabilities as well as its assets to market. As a company's credit rating goes down, so does the price of its debt, which therefore must be re-measured by marking the liability to market. The difference between the debt's carrying value and its so-called fair value is then recorded as a debit to liabilities, and a credit to income.

Credit Risk in Liability Measurement >>> A paper prepared for the IASB by its staff... Comments to be received by 1 September 2009 (25 pages in PDF)

VRC (Valuation Research Corporation), a leading provider of valuations and value-related advisory services, recently completed a survey of financial professionals views on Fair Value Accounting (FVA), also known as mark-to-market accounting. The survey found a majority believed that market turmoil and the collapse of active markets for many assets caused implementation issues in Fair Value Accounting. According to the survey, 58% of respondents believe that market turmoil negates Fair Value Accountings validity. Further, of those who believed FVA was flawed and potentially not valid during market turmoil, almost 34% suggested a temporary return to historical cost accounting as an alternative.

President Obama...presented a plan for regulatory reforms that would consolidate banking regulators, create new government agencies and give new powers to the Federal Reserve. One proposal of particular interest to the accounting profession includes three recommendations addressed to accounting standard setters. * clarify and make consistent the application of fair value accounting standards, including the impairment of financial instruments, by the end of 2009 * improve accounting standards for loan loss provisioning by the end of 2009 that would make the loan loss provisioning more forward looking, as long as the transparency of financial statements is not compromised and * make substantial progress by the end of 2009 toward development of a single set of high quality global accounting standards.

 

U.S. rulemaker eases mark-to-market's bite

Thu Apr 2, 2009 2:38pm EDT

Reuters, By Al Yoon

NORWALK, Connecticut (Reuters) - U.S. accounting standard-setters bowed to congressional and banking industry pressure on Thursday and allowed more flexibility in valuing toxic assets that have forced billions of dollars in writedowns.

The five-member Financial Accounting Standards Board voted unanimously to let banks exercise more judgment in mark-to-market accounting, to determine whether a transaction is distressed and a market is inactive.

But in a move that would help many U.S. banks report stronger results, the board split 3-2 in approving guidance that would let lenders take smaller losses on impaired assets available for sale.

"I think this is an improvement," FASB Chairman Robert Herz said of the changes during FASB's three-hour meeting in a drab boardroom that was filled with dozens of representatives of accounting firms, banks and insurance companies.

But board members Marc Siegel and Thomas Linsmeier cast dissenting votes on the new guidance for how companies write-down assets that have dropped significantly in value.

The changes would take effect in the second quarter for most U.S. financial firms, but early adoption could be allowed for first quarter results.

Many lawmakers, banks and other supporters of the changes argue that pricing assets to firesale prices during a time of inactive markets has exacerbated the financial crisis through the writedowns, big earnings hits, damage to capital ratios, and a reduced ability to lend.

Investors take a different view, saying that more flexibility with the rules would let big banks hide the real value of their toxic assets.

DARK DAY FOR SOME

Robert Willens, an analyst who specializes in tax and accounting issues, said the changes will help banks cosmetically and increase their capital levels.

"Yet I'm finding the investors I speak to are mostly disappointed because it doesn't change the reality of the banks," he said. "This may end up being a dark day in history before it's all said and done. It's a pyrrhic victory."

A Congressional panel last month told Herz to move quickly to ease the mark-to-market guidance or lawmakers would take action. Four days later FASB issued two proposals: one to give banks more flexibility in applying mark-to-market accounting and another addressing when banks must take writedowns on impaired assets.

The Financial Services Roundtable, which represents the largest financial firms welcomed FASB's actions. "The guidance will remove artificially downward pressure on asset value and actually help restore the economy," said Scott Talbott, the roundtable's chief of government affairs.

The accounting board considered hundreds of letters and e-mails sent by banks, investors and others commenting on the FASB proposals.

Herz also said FASB "did extensive outreach to investors, particularly major investors in financial institutions" ahead of Thursday's meeting.

But FASB members Siegel and Linsmeier were unhappy with the easier standard on writing down assets.

"I'm afraid that this change will result in fewer impairments being recognized, and I don't think that will help the investor confidence in the balance sheet," said Siegel at the meeting.

FASB SPLITS ON WRITEDOWNS

Linsmeier and Siegel sparred over whether to call the change "ridiculous" or "ludicrous," and Linsmeier said the board was making changes to address regulatory capital concerns.

"I find one of the most unfortunate parts of this to be the fact that we're continuing to take the responsibility on rather than having the regulators to take this on," said Linsmeier, a FASB member for three years and former chairman of Michigan State University's accounting department.

Siegel joined the board in October. He had led an accounting research and analysis team at RiskMetrics Group that focused on investor-oriented issues.

In considering the proposals on Thursday, FASB said the objective of mark-to-market, or fair value accounting, in inactive markets should be to determine what an asset could fetch in an "orderly" transaction between market participants. Such an "orderly" transaction would not include distressed transactions or fire-sales, it said.

(Additional reporting by Emily Chasan and Rachelle Younglai in Washington; editing by Tim Dobbyn)

___________________________________________________________
FASB Reaffirms Original Principles of Fair Value (aka Mark-to-Market) Accounting and Requires More Disclosures. Board Calls for Changes in Accounting for Impairments

The FASB considered three proposals yesterday. Two of the proposals were related to fair value (mark-to-market) accounting, and one was associated with accounting for impaired securities, such as mortgage-backed securities.

The first proposal (on FAS 157) relates to how to figure out fair values when there is no active market or where the price inputs being used really represent distressed sales. After considering all of the feedback we received on our original proposal issued two weeks ago, the FASB yesterday reaffirmed that the objective of measuring fair value has always been and continues to be the same since FAS 157 was published. [Emphasis in the original] The objective is to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements. Specifically, yesterday's vote said that companies should look at factors and use judgment to ascertain if a formerly active market has become inactive.

Once a company has made that determination, more work will be required to estimate the fair value. In trying to estimate fair value in an inactive market, the company must see if the observed prices or broker quotes obtained represent "distressed transactions". Other techniques such as a management estimate of the expected cash flows might also be appropriate in that circumstance. However, even if a company analysis is used, it must meet the objective of estimating the orderly selling price of the asset under current market conditions. Some financial institutions have made public statements that they do not expect this proposal to significantly impact their financial statements.

The second proposal relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. The current rule is that fair values for these assets and liabilities are only disclosed once a year. The Board voted yesterday that these disclosures should be required on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. For commercial banks, one financial asset impacted by this is loans, which will now have disclosures about their fair value every quarter.

The third proposal deals with other-than-temporary impairment (OTTI). The proposal would not change when a company recognizes impairment. It could change where [emphasis in the original] in the financial statements the impairment is reported. Under the current rules, unless the severity and duration of a drop in fair value is too great, if a company can assert that it intends and is able to hold a security until the fair value recovers, it need not record an impairment charge on the income statement. The new proposal the Board approved indicates that no impairment charge is required if there is both no current intention to sell and, it is more likely than not, that it will be required to sell prior to the fair value recovering.* However, if management expects at the financial statement date that all of the cash flows won't be 100% collected, an impairment must be recorded in the statement of income.


In certain situations, the proposal changes the presentation of the impairment charge, splitting it up into two pieces. First, the amount of the impairment related to just the credit losses will be reflected on the income statement and will reduce net income. Second, the amount of the impairment related to all other factors will be shown in other comprehensive income in the equity section of the balance sheet. There will be a "gross" presentation of this on the income statement, one which will clearly display the total reduction in fair value below cost, the amount offsetting it that is being charged to other comprehensive income, and the net amount that is being recorded through net income.

Many balance sheet metrics used to analyze banks, such as Tangible Common Equity, should be relatively unaffected by this proposal, though earnings, other comprehensive income and retained earnings would be impacted. The Board did add significant new disclosures as part of this proposal as well.

Generally, these new proposals will be effective for the second quarter, though companies may elect to adopt them for the first quarter. However, we indicated that if a company wants to adopt the impairment proposal in the first quarter, it must also adopt the FAS 157 fair value in inactive markets proposal.

These proposals should be considered in the context of the larger ongoing joint project with the International Accounting Standards Board (IASB) to reconsider accounting for financial instruments. A proposal on this project is expected to be issued later this year.

*This sentence may be true for a HTM security but it is not true for an AFS security. For an AFS security an impairment charge is required anytime the security's fair value is below cost since the measurement attribute for AFS securities is fair value - it just maybe that the charge would go into OCI—instead of earnings if it is determined to be not other than temporary.

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Forbes.com


Money
Why Mark-To-Market Accounting Rules Must Die
Brian S. Wesbury and Robert Stein

We have been accused of beating a dead horse when it comes to our support for either suspension of, or targeted relief from, market-to-market accounting.

And we suppose after writing thousands of words, producing videos and giving speeches about the issue, some might be tempted to let it go. But we can't do that, especially when the government continues to spend trillions of dollars and is coming very close to bank nationalization.

This is a real shame. Suspending mark-to-market accounting could fix major problems at no cost. Unfortunately, many people dismiss this issue without really understanding its impact on the economy.

We are economists, not accountants or bank analysts. We really don't think a debate about how big the housing bubble was, or whether a certain bank is viable or not, is worthwhile when it comes to accounting rules. That misses the point. Mark-to-market accounting rules affect the economy and amplify financial market problems.

The history seems clear. Mark-to-market accounting existed in the Great Depression, and according to Milton Friedman, who wrote about it just 30 years after the fact, it was responsible for the failure of many banks.

Franklin Roosevelt suspended it in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened.

Two things are absolutely essential when fixing financial market problems: time and growth. Time to work things out and growth to make working those things out easier. Mark-to-market accounting takes both of these away.

Because these accounting rules force banks to write off losses before they even happen, we lose time. This happens because markets are forward looking. For example, the price of many securitized mortgage pools is well below their value, based on cash flows. In other words, the market is pricing in more losses than have actually, or may ever, occur. The accounting rules force banks to take artificial hits to capital without reference to the actual performance of loans.

And this affects growth. By wiping out capital, so-called "fair value" accounting rules undermine the banking system, increase the odds of asset fire sales and make markets even less liquid. As this happened in 2008, investment banks failed, and the government proposed bailouts. This drove prices down even further, which hurt the economy. And now as growth suffers, bad loans multiply. It's a vicious downward spiral.

In the 1980s and 1990s, there were at least as many, and probably more, bad loans in the banking system as a share of the economy. The difference was that there was no mark-to-market accounting. This gave banks time to work through the problems. At the same time, the U.S. cut marginal tax rates and raised interest rates, which helped lift economic growth. Time and growth allowed those major banking problems to be absorbed, even though roughly 3,000 banks failed, without creating an economic catastrophe.

In Japan, during the 1990s, the government allowed banks to operate without ever recognizing bad loans, which certainly bought time. However, Japan increased taxes and ran an excessively tight monetary policy, which undermined growth. This created an economic disaster. The real problem with Japan was not zombie banks; it was that there was no growth. After all, foreign banks were allowed to lend in Japan and were not in bad shape like the Japanese banks. They stayed away from Japan because the economy was not vibrant.

A final example: In the 1930s, because mark-to-market accounting existed, we limited the amount of time available to fix problems. At the same time, the U.S. raised taxes, increased spending and economic interference, and became protectionist. This hurt growth. The reason the Great Depression was so bad is that we took away time and growth.

Anyone worried about repeating the errors of Japan in the 1990s or the U.S. in the 1930s should focus on the policies that impeded recovery. Suspending mark-to-market accounting is a cost-free way to buy time. It does not allow banks to sweep bad loans under the rug. Bad loans are still bad loans, and banks cannot hide from them. Not suspending it, while at the same time interfering in the economy with massive stimulus and bank nationalization, is a recipe to undermine both time and growth and therefore hurt the economy even more.

Brian S. Wesbury is chief economist, and Robert Stein senior economist, at First Trust Advisors in Lisle, Ill. They write a weekly column for Forbes.

__________________________________________________________________---


Forbes.com


FASB
Mark-to-Messy Accounting Change

Dan Bigman and Maurna Desmond 

Mark-to-market rules on valuing assets have been softened. Expect banks, hard-pressed to right their balance sheets amid imploding markets, and their investors to cheer. Not everyone is so happy.

The Financial Accounting Standards Board voted Thursday to allow firms greater leeway in how they value illiquid assets. Currently, investments like mortgage-backed securities are priced based on their last sale. Since the seller is usually distressed and parts with their goods for a fire-sale price, all similar assets must be marked to a lower price.

Critics of this brand of "fair value" accounting, outlined in FASB rule FAS 157, say it's crippled the banking system, forcing firms to continually write down the value of assets in the worst possible market conditions, regardless of whether or not they're for sale. This, in turn, has put tremendous strain on balance sheets, forcing financial companies to hunt for new capital to make up for paper losses at a time when few investors are willing to put money into banks. The spiral devastated the industry.

As Forbes chairman and editor-in-chief Steve Forbes has noted in repeatedly calling for ending mark-to-market rules, of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses. "Mark-to-market accounting is the principal reason why our financial system is in a meltdown. The destructiveness of mark-to-market--which was in force before the great depression--is why FDR suspended it in 1938. It was unnecessarily destroying banks", he says (see: "End Mark To Market").

With the changes to rule 157, companies can now value the assets on their books as if they were unloaded in an "orderly" sale rather than dumped in a forced or "distressed" sale. The guidelines will apply starting in the second quarter, which began Wednesday.

Good news for these uncommonly bad times, which demand bold remedies. But the point of FAS 157, critics of its repeal remind us, was to avoid the kind of dot-com bubble, Enron-era mark-to-fiction accounting that artificially inflated the value of companies, leaving investors holding the bag when optimistic company guesses met real-world market pricing. "[the changes] would basically give businesses more leeway to decide what they report is on their books. That can't help investor confidence," says Espen Robak, president of Pluris, a valuation advisory firm. "That means higher cost of capital for everyone."

The Center for Audit Quality, a Washington, D.C.-based nonprofit, has said that letting firms make more subjective valuations will "reduce the transparency that investors seek" and "would have significant unintended consequences."

One of the inadvertent effects could be that current methods, based on recent transactions, are rendered incomplete, forcing firms to spend time and money trying to assess what they have on their books. Investors will have to increase their own due diligence because reporting would be less standard and some firms might be more optimistic than others. "The ones who will benefit are the ones who push the envelope most," says Robak.

Another concern: The definition of "illiquid markets" isn't clearly outlined. This is problematic because so many different types of assets aren't being traded much from municipal bonds to many types of complex financial instruments. The proposal is meant to help de-clog balance sheets by addressing the issues of certain unpopular investments, but it doesn't limit the scope of the rule change.

Others argue that a far simpler way to help banks meet their capital requirements is to simply lower the capital requirements explicitly, instead of implicitly doing so by letting them fudge the numbers. That approach has its own perils.

Accounting, in the end, is about judgments and assumptions and, ultimately, convenient fictions. Accountants don't determine the real price of anything. Only markets can do that. But they have to be functioning normally to do so. When they are aren't fair-value accounting does more harm than good, but when order returns, we will be reminded why we need it.

_____________________________________________________--


Forbes.com


Intelligent Investing
Steve Forbes: End Mark-To-Market

What is most astounding about President Barack Obama's radical economic recovery program isn't its breadth, but its continuation of the most destructive policies of the Bush administration. These Bush policies were, in themselves, repudiations of Franklin Delano Roosevelt, Mr. Obama's hero.

The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or "fair value" accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.

Banks and life insurance companies that have positive cash flows now find themselves in a death spiral. Of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses. When banks or insurers write down the value of their assets, they have to get new capital. And the need for new capital is a signal to ratings agencies that these outfits might deserve a credit-rating reduction.

Mark-to-market accounting is the principal reason why our financial system is in a meltdown. The destructiveness of mark-to-market--which was in force before the great depression--is why FDR suspended it in 1938. It was unnecessarily destroying banks.

If the president really takes Roosevelt's legacy seriously, he should suspend mark-to-market accounting rules, restore the uptick rule and enforce the prohibition against naked short selling. If he doesn't, historians will look back in utter amazement at Mr. Obama's preservation of Mr. Bush's worst economic policies.

___________________________________________________________

Banks and accounting standards

Messenger, shot

Apr 8th 2009
From The Economist print edition

Accounting rules are under attack. Standard-setters should defend them. Politicians and banks should back off

 

Illustration by Claudio Munoz

IN PUBLIC, bankers have been blaming themselves for their troubles. Behind the scenes, they have been taking aim at someone else: the accounting standard-setters. Their rules, moan the banks, have forced them to report enormous losses, and it’s just not fair. These rules say they must value some assets at the price a third party would pay, not the price managers and regulators would like them to fetch. Unfortunately, banks’ lobbying now seems to be working. The details may be arcane, but the independence of standard-setters, essential to the proper functioning of capital markets, is being compromised. And, unless banks carry toxic assets at prices that attract buyers, reviving the banking system will be difficult.

On April 2nd, after a bruising encounter with Congress, America’s Financial Accounting Standards Board (FASB) rushed through rule changes. These gave banks more freedom to use models to value illiquid assets and more flexibility in recognising losses on long-term assets in their income statements. Bob Herz, the FASB’s chairman, decried those who “impugn our motives”. Yet bank shares rose and the changes enhance what one lobbying group politely calls “the use of judgment by management”.

European ministers instantly demanded that the International Accounting Standards Board (IASB) do likewise. The IASB says it does not want to be “piecemeal”, but the pressure to fold when it completes its overhaul of rules later this year is strong. On April 1st Charlie McCreevy, a European commissioner, warned the IASB that it did “not live in a political vacuum” but “in the real world” and that Europe could yet develop different rules.

It was banks that were on the wrong planet, with accounts that vastly overvalued assets. Today they argue that market prices overstate losses, because they largely reflect the temporary illiquidity of markets, not the likely extent of bad debts. The truth will not be known for years. But banks’ shares trade below their book value, suggesting that investors are sceptical. And dead markets partly reflect the paralysis of banks which will not sell assets for fear of booking losses, yet are reluctant to buy all those supposed bargains.

To get the system working again, losses must be recognised and dealt with. Japan’s procrastination prolonged its crisis. America’s new plan to buy up toxic assets will not work unless banks mark assets to levels which buyers find attractive. Successful markets require independent and even combative standard-setters. The FASB and IASB have been exactly that, cleaning up rules on stock options and pensions, for example, against hostility from special interests. But by appeasing critics now they are inviting pressure to make more concessions.

To reveal, but not to regulate

Standard-setters should defuse the argument by making clear that their job is not to regulate banks but to force them to reveal information. The banks, their capital-adequacy regulators and politicians seem to dream of a single, grown-up version of the truth, which enhances financial stability. Investors and accountants, however, think all valuations are subjective, doubt managers’ motives and judge that market prices are the least-bad option. They are right. A bank’s solvency is a matter of judgment for its regulators and for investors, not whatever a piece of paper signed by its auditors says it is. Accounts can inform that decision, but not make it.

Banks’ regulators have to take responsibility. If they want to remove the mechanical link between drops in market prices and capital shortfalls at banks, they should take the accounts that standard-setters create for investors and adjust them when they calculate capital. They already do this to some degree. But the banks’ campaign twant. But in doing so they must not compromise their duty to investors.o change the rules is making inevitable a split between two sets of accounts, one for regulators and another for investors. The FASB and IASB can help regulators to create whatever balance-sheet they want. But in doing so they must not compromise their duty to investors.

La contabilidad según valor razonable...Entre los modelos tradicionales de valoración de los instrumentos financieros, el más utilizado ha sido el denominado modelo mixto, en el que los instrumentos que se mantienen para la negociación se valoran por su precio de mercado, mientras que el resto se valoran según su coste histórico. Frente a éste, se encuentra el método denominado fair value o valor razonable en el que la mayoría de los instrumentos financieros se registran por su valor de mercado. La aplicación de uno u otro es trascendental en el caso de las entidades de crédito ya que la mayor parte de su balance está constituido por instrumentos financieros. En los últimos años, tanto los legisladores internacionales como los nacionales han dado pasos para extender la aplicación del criterio del valor razonable a grupos cada vez mayores de activos y pasivos.

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Whenever you find you are on the side of the majority, it is time to pause and reflect

                     --- Mark Twain

We have never observed a great civilization with a population as old as the United States will have in the twenty-first century; we have never observed a great civilization that is as secular as we are apparently going to become; and we have had only half a century of experience with advanced welfare states...Charles Murray

Kella
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