Mark-to-Market Debate » Fair Value

Broad Support for Putting Fair Value On Balance Sheet

admin — Fri, 24 Sep 2010 12:00:24 +0000

In a recent survey conducted by Grant Thornton, 37% of U.S. CFOs and senior controllers agree with the Financial Accounting Standards Board (FASB) proposal that a balance sheet should display both the fair value (exit value) and amortized cost of assets. Whereas 37% prefer just reporting amortized cost and the remaining 26% favored fair value only.
Of the 496 respondents, only 5% agree that the income statement should reflect the change in fair value. Instead 66% believe the income statement should only reflect revenues when earned and the corresponding costs.
Grant Thornton Professional Standards partner John Hepp explains, “The data indicate that there is support for fair value accounting on the balance sheet, but not on the income statement.” He continues, “This echoes comment letters from constituents that have called on the FASB and the IASB (International Accounting Standards Board) to clarify how to present changes in fair value and the principles underlying other comprehensive income.”
This is so simple it defies conventional wisdom. 1) Disclose both. 2) Don’t take a hit to income until sale.

Bankers React to FASB’s Proposed Change in Fair Value Accounting

admin — Wed, 22 Sep 2010 12:00:37 +0000

Lobbyists and bank CFOs have been voicing their opposition to the Financial Accounting Standards Board’s new exposure draft on accounting for financial instruments. They warn that it could have adverse consequences for commercial banks.
“This is really a jaw-dropping proposal,” says Donna Fisher, senior vice president of tax and accounting at the American Bankers Association.
Bankers have taken particular issue with the requirement that even “plain vanilla” loans held for collection be marked to market. They believe this runs the risk of damping origination of long-term, variable-rate loans, as well as scaring off bank investors and increasing procyclicality in the financial system.
In an effort to ease the transition proposed by the exposure draft, the Board will give nonpublic banks with less than $1 billion in total consolidated assets an additional four years to adopt the new fair value accounting requirements

FASB Proposes Mark-to-Market Accounting Rules

admin — Wed, 15 Sep 2010 12:00:35 +0000

The Financial Accounting Standards Board has proposed new rules under which banks and other lenders would be required to use mark-to-market accounting.
Banks would have to report both the fair value and amortized cost of loans and some other financial assets and liabilities on their balance sheets under the new rules. Changes in fair value would, in most cases, be recognized in other comprehensive income and could cause swings of billions of dollars in the book values for the biggest lenders.
The American Bankers Association released a statement that said the accounting change would present “significant problems, not only for banks, but also the general economy. If implemented, the proposal would greatly undermine the availability of credit by making it difficult to make many long-term loans, the value of which, even if performing perfectly, would likely be reduced on the day a loan is made.”
The rules would take effect for the biggest banks as early as 2013. Smaller banks, with less than $1 billion in assets, would be permitted to wait until 2017. The FASB is seeking comment through September 30, 2010.
This is restrictive and gets it half right. Report the fair value, disclose it and keep it current. But don’t hit the lenders in the O.C.I. This will discourage lending. Period.

Kanjorski Changes Position On Mark to Market.

admin — Fri, 10 Sep 2010 12:00:02 +0000

Paul Kanjorski (D-PA), chairman of a subcommittee of the House Financial Services Committee, came out strongly opposed to mark to market accounting in a March 2009 hearing he conducted. At that time he complained:
The magic of mark to market accounting required this relatively minor shortfall to be treated as an other-than-temporary-impairment loss of $87.3 million. I find that accounting result to be absurd. It fails to reflect economic reality. We must correct the rules to prevent such gross distortions.
In a recent press release announcing new hearings to assess accounting rules and a lack of transparency in financial reporting, Mr. Kanjorski appears to have modified his position:
“…We must ensure that accounting and auditing standards respond to the needs of investors by producing timely and accurate assessments of a company’s financial situation. This hearing will enable Congress to review the current accounting and auditing standards that apply to participants in our financial markets and discuss how we can improve them in the future.” (Emphasis added.)
I agree and disagree. Accounting should reflect the economics, not drive them. This isn’t either/or. Let’s report the fair value by informing investors in the footnotes.

Brown Proposes Fair Value Amendment

admin — Mon, 06 Sep 2010 12:00:52 +0000

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.

Battle Explains Fair Value

admin — Thu, 12 Mar 2009 14:42:11 +0000

Brian Battle torments Becky Quick again on CNBC Squwak Box with another explanation of fair value.

Watch the video below!