Brown Proposes Fair Value Amendment

Senators Sharrod Brown (D-OH) and Edward Kaufman (D-DE) have offered an amendment to the Restoring American Financial Stability Act of 2010 that would essentially require the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) or both to establish a rule that publicly traded companies list all assets and liabilities on the balance sheet and that these be recorded at fair value.
Historically accounting standards have allowed off balance sheet financing via leases and repurchase agreements. It was recently learned that Lehman Brothers used repurchase accounting to remove liabilities from the balance sheet in a maneuver to increase leverage.
The amendment, if adopted and passed, would also present an obstacle to the effort to merge FASB ad IASB standards. The FASB prefers fair value basis, however the International Accounting Standards Board (IASB) is opposed.
The American Institute of Certified Public Accounts, the Center for Audit Quality, the Chartered Financial Analyst Institute, the Council of Institutional Investors, the Investment Company Institute, the Financial Executives International, and the U.S. Chamber of Commerce have objected to the Brown amendment. Their stated position, in part, is:

We believe political influences that dictate one particular outcome for an accounting standard without the benefit of a public due process that considers the views of investors and other stakeholders would have adverse impacts on investor confidence and the quality of financial reporting, which are of critical importance to the successful operation of the U.S. capital markets.

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IASB Responds to Criticism Over Mark to Market Accounting

In response to criticism about the effects of fair value accounting, the International Accounting Standards Board (IASB) has made public its proposed changes to the accounting standard for financial liabilities.
Should the proposal be approved, all gains and losses resulting from changes in “own credit” for financial liabilities that an entity chooses to measure at fair value would be transferred to “other comprehensive income.”
“Whilst there are theoretical arguments for treating financial assets and liabilities in the same way, it is hard to defend the accounting as providing useful information when a company suffering deterioration in credit quality is able to book a corresponding large profit,” said Sir David Tweedie, Chairman of the IASB. “Especially when investors tell us that such information is often excluded from their financial models.”

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Mark-To-Market Impacts Pension Funds

It is anticipated that corporations would take less equity and other investment risk in their defined benefit plans if a revision the International Accounting Standards Board (IASB) is proposing for pension accounting is adopted. The IASB provision would require companies to immediately recognize gains and losses in their defined benefit plans on their income statements. These changes are now amortized over an extended period of years.
Caitlin Long, managing director and head of the pension solutions group of Morgan Stanley, New York, explains that the current amortization is “an incentive in GAAP (Generally Accepted Accounting Principles) to take more investment risk.”
Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets, Bethesda, Md., was also quoted by Pension & Investments and she agrees. “The closer you get to mark-to-market (accounting) the more derisking you have in (pension fund) portfolios and the more expensive plans would be.”
The IASB proposal would bring market valuation of pension plan gains and losses to the income statement.
“We argue this whole trend is pushing plans away from a long-term focus, and the more you do that the more you undermine existing plans,” Schub said.
MTM for pension funds is backwards. Don’t we want our pension funds to be intended to take the “long-term” view?

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SEC Focuses on IASB Funding

Jim Kroeker, Chief Accountant of the U.S. Securities and Exchange Commission, says efforts are now focused on securing funding for the International Accounting Standards Board (IASB). The IASB writes the International Financial Reporting Standards (IFRS) that are used by more than 100 countries, which may soon include the U.S.
“A stable broad-based funding system with a diversity of capital market participants providing ‘no strings attached’ funding is of great importance to establishing a structurally sound international standards setter,” Mr. Kroeker said to an accounting conference at Baruch College in New York.
Mr. Kroeker’s comments come as political pressure on accounting rule-makers mounts worldwide. Last year, some in the European Union threatened to make their own changes to accounting rules if the IASB did not immediately adjust mark-to-market accounting rules.

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IASB and FASB at Impasse over Mark-to-Market Accounting

Mark-to-market accounting is proving to be a major sticking point in efforts to converge the world’s two most important accounting systems, Generally Acceptable Accounting Principles (GAAP) and International Financial Reporting Standards (IASB). In September, the “Group of 20” leading industrialized nations pledged to create a single global set of accounting rules by June 2011.

In a joint statement, the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) said that they had failed to reach an agreement on the valuation of financial instruments. They commented that there was “no guarantee” they would be able to resolve their differences and that it “could affect the project timetables.”

The FASB supports a more widespread use of mark to market accounting than the IASB.

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FASB and IASB Struggle to Meet in the Middle

While banks and politicians have leaned on accounting regulators to incorporate economic stability concerns into their accounting rules, the question of how banks should value financial instruments remains a subject of intense debate.

“Politicians have been saying a major objective of financial reporting is stability — we think it’s transparency,” said International Accounting Standards Board Chairman Sir David Tweedie.

The IASB had proposed to have assets valued at “amortized cost,” while the U.S. Financial Accounting Standards Board suggested that all financial instruments be valued at market levels. Valuing loans at a market rate would be a significant expansion of mark-to-market accounting, which has been vehemently opposed by the banks.

The FASB and IASB have been working over the last few months to reconcile their views.

Transparency is a better goal. Mark your bonds or loans to whatever price you think, then let the market decide whether you are a liar, a cheat or a charlatan. You just have to publicly disclose, quickly.

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Checks On IASB Called For

As of next year, the International Accounting Standards Board will assume considerably more influence when its rules form the basis for a single set of global standards.

To balance this increase in power, the G20 has called for the creation of an independent monitoring body. This was necessary, said David Wright, deputy head at the EU’s European Commission internal market unit, to “depoliticize” accounting standard setters.

This follows from the G20’s agreement last September that mark-to-market rules needed to be resolutely and quickly reformed – although the aggressiveness of this stance alarmed certain parties.

“Full respect to due process is a must,” said Fernando Restoy, chairman of the Committee of European Securities Regulators and quoted by Reuters.  ”The monitoring board is a very big step forward but there is room to think a bit more about the right governance structure.”

Critics in the US and worldwide blame market-to-market rules for amplifying the impact of the credit crunch by forcing banks to price assets at depressed prices, triggering fire sales to replenish capital. These rules were subsequently eased by in the US by the Financial Accounting Standards Board in April 2009.

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