FASB Mark-to-Market Plan Could Have a Seismic Impact
Accounting standard-setters issued new rules Wednesday that could have profound effects, not just on how assets and liabilities get valued but on how banks and financial services firms do business.
Insurance Networking News, May 27, 2010
The Financial Accounting Standards Board wants to vastly expand the use of mark-to-market accounting. In a draft ruling posted on its Web site late Wednesday, the FASB proposed that banks value unfunded loan commitments and loans they plan to hold to maturity in the same way they currently value loans they intend to sell. The rule also would change the way deposits are valued.
The proposal would be "the biggest accounting event we have ever seen," said Donna Fisher, a senior vice president with the American Bankers Association.
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If approved, she said, the new rule could alter the banking landscape by steering the industry away from products with greater potential for volatility in their market price and in their impact on the numbers in banks' financial statements. For instance, banks might decide to scale back issuance of 30-year, fixed-rate mortgages. Instead they might push products with shorter maturities or variable rates, which theoretically would have less price volatility in the markets because the duration or interest rate risks have been reduced.
The industry is bracing for change at the conclusion of a drawn-out debate that heated up dramatically as the financial crisis raised concerns on both sides of the argument, calling into question whether banks' stated loan values could be trusted and whether it is wise to peg loan values to markets proven vulnerable to wild mood changes.
The bank lobby has strenuously opposed efforts to broaden the implementation of mark-to-market accounting, arguing that the value of assets that banks are holding for the long haul should not be subject to the vagaries of the markets.
"We've had discussions with them [the FASB] for 20 years now about how accounting should follow the business model, so that if you're buying and selling loans you should mark them to market, but if you're not, having the swings in market value flowing through to your financial statements is misleading," Fisher said.
FASB officials on Wednesday were attending the final portion of a two-day trustee meeting and were not available to comment on the contents of the proposal.
Opponents of the FASB's thinking will have one more chance to influence it, during the public comment period that will end Sept. 30. Public roundtables will be held in October. Once the comments are in, the FASB will deliberate again before releasing any final rule changes.
FASB officials have argued that mark-to-market accounting gives investors a clearer picture of a company's worth, and makes it easier to compare financial statements across an industry. But making mark-to-market the default accounting method for financial instruments arguably conflicts with the desires of bank regulators and the Group of 20 to reduce pro-cyclicality, so that market forces don't whip up too much froth in the financial system during boom years or exaggerate the crash in crisis periods.
FASB Chairman Robert Herz, who said last summer that any rule changes on mark-to-market would not be adopted until 2011 at the earliest, has acknowledged the competing interests of accountants and regulators.
"It may not be possible [for accountants and bank examiners] to find common ground in every case, not because we aren't communicating but because our different missions take us down different roads," Herz said in a December speech to the American Institute of Certified Public Accountants. "[Bank] regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system."
Currently, loans and debt securities that banks plan to hold to maturity are recorded at amortized cost, though so-called fair values based on mark-to-market accounting methods are disclosed in footnotes to the financial statements.
The FASB proposed Wednesday that all loans and debt securities get recorded at fair value on the balance sheet, as would most financial liabilities.
For hold-to-maturity instruments, the proposed guidance "would recognize the utility to financial statement users of both fair value and amortized cost information by requiring a reconciliation from amortized cost to fair value on the face of the statement of position," according to the 214-page exposure draft detailing the FASB's proposal.
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