From THE Chairman from the FASB regarding “valuation”
Today, in a WSJ article, Regulators Draw Fire in Congress, Bob Herz, Chairman, suggests that preparers and auditors are not using enough flexibility in Level 3 pricing calculations…
Defenders of mark-to-market rules said it is the most-accurate way to put a value on a company, and weakening the principle would mask bad balance sheets and undermine confidence in the markets.
Financial Accounting Standards Board Chairman Robert Herz defended the standards set by his independent body and suggested businesses weren’t applying them correctly. When markets dry up, management and auditors are permitted to use other factors, such as cash flow, to determine an asset’s value. They don’t have to rely solely on a price set in traded markets, Mr. Herz said.
“The intent is to try to get a reasonable valuation,” he said. “I’m saying here on live public television: The standard allows for the exercise of appropriate judgment. I’m going to say that and say that again.”
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FASB 114 and 157 should be amended or suspended to provide for impaired loans that are considered to be held for investment (like securities), be carried at cost (current book value, excluding prior writedowns) for the next 3 years since 1/1/09. Any writedowns charged to the allowance for loan losses, or included as an “impairement” amount for spedific loans in the allowance for loans losses calculation since 1/1/08 should be allowed to be reversed. Provisions recorded in the allowance for loan losses of commitments related to impaired loans since 1/1/08 should also be allowed to be reversed to income. None of these adjustment reversals should be considered as the FASB 5 component of the allowance for loan losses computations.
AFS investment securities with OTTI writedowns since 1/1/08 should be allowed to be reversed. Values should be restated to amortized cost as of 1/1/08. Footnote disclosure should be made for these reversal of writedowns. In 3 years since 1/1/09 the opinion calling for a requirement of OTTI writedowns should be evaluated
Suspend the requirements of FASB 114/157 for appraisals, or cash flow computations, for all loans held for investment that are considered “impaired” for the same 3 year period since 1/1/09 noted above.