FASB approves more mark-to-market flexibility
Panel passes measure unanimously; measure could boost bank profit
By Ronald D. Orol, MarketWatch
Last update: 11:19 a.m. EDT April 2, 2009WASHINGTON (MarketWatch) -- Responding to pressure applied by lawmakers on Capitol Hill, the Financial Accounting Standards Board on Thursday voted unanimously to give auditors more flexibility in valuing illiquid mortgage assets that may have long-term value.
The new guidance, which is expected to boost bank operating profits when they report first quarter results later this month, alters so called mark-to-market rules, which require banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments based on the current market price for either the security or a similar asset.
Banks complain they can't sell certain assets because of a lack of a market, but that the assets are not distressed and have strong cash flow.
Seeking to resolve this situation, FASB's guidance allows banks and their auditors to use "significant judgment" when valuing the illiquid assets. For example, if companies have strong cash flows that can be estimated, then those cash flows would be used to estimate market value in the illiquid market. This approach could be used when bank auditors determine there is a "significant decline of a market for new issuances," in other words if there was a primary market and now there is no market.
Another provision that the FASB board approved would allow companies to put certain illiquid debt assets they would otherwise have been forced to write down into a category called "other comprehensive income." As a result, financial institutions' operating income is improved because they can record a lower amount of loss in their income statements.
These are illiquid securities that are "impaired," which means companies no longer believe they can collect all the amounts due.
The provision allows banks to make changes to their first-quarter results, which are expected to be released by mid-April. However, FASB members argued that it will be very difficult for banks to make the adjustment during that period. If companies want to use the one measure to adjust their balance sheets, they also need to apply the second provision.
Most banks report their first-quarter results by mid-April, so the new FASB guidance rules will apply retroactively for January, February and March, 2009.
Columbia Business School Accounting Professor Robert Willens said new audit guidance, which would give banks the ability to use internal models and analysis to value their illiquid assets, could hike their earnings on average by 20%. However, he added that large banks such as Citigroup Inc. would get "the lions share" of the revaluation profits because they are stuck with a disproportionately large amount of the illiquid mortgage and other securities.
The retroactive issue
The American Bankers Association met Tuesday to discuss their lobbying strategy on banking legislation, which includes pressing lawmakers to urge FASB and its parent regulator, the SEC, to alter mark-to-market rules. ABA vice president Donna Fisher pressed bankers to push lawmakers and FASB on the rules.
In addition to altering accounting guidance, bankers are pressing lawmakers to set up a procedure to retroactively recoup losses they have already taken on impaired illiquid assets.
House Financial Services Committee Chairman Barney Frank, D-Mass., told the ABA Tuesday that he will take their concerns about reversing retroactive losses to the SEC and Congress. "They [bankers] ought to be able to go back and say they took that loss on an asset that is being held to maturity and recoup that loss," Frank said.
However, Willens said it would be extremely unusual for FASB to allow banks to go back and restate their existing earnings. "FASB doesn't traditionally do that, but Frank's pressure could make it happen," he said.
The bankers also discussed plans to talk with lawmakers on Capitol Hill about their support for legislation introduced by Reps. Ed Perlmutter, D-Colo., and Frank Lucas, R-Ok., which would create a Federal Accounting Oversight Board made up of officials from FASB, the Federal Deposit Insurance Corp., Federal Reserve, Treasury Department and the Public Company Accounting Oversight Board. Fisher said that within this context regulators would see the bigger picture when it came to the impact of mark-to-market accounting rules on the markets.
Ronald D. Orol is a MarketWatch reporter, based in Washington.