Hussman Rips FASB on Mark-to-Market Decision

May 17, 2011 by · Leave a Comment
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In his “Open Letter to the Financial Accounting Standards Board (FASB),” financial analyst and mutual fund owner John Hussman criticized the FASB’s decision to back off of its proposal that would have applied mark-to-market accounting to a broad range of financial instruments. Hussman, who is known as one of the few analysts who warned of an economic collapse well before the financial crisis, has frequently spoken out against the board.

Hussman rails against the move back to amortized cost in the letter, saying that the board ignored a procedure that would require and produce an adequate valuation due to banking industry pressure. “The FASB is a standards board. You are not running a popularity contest,” he says. The letter claims the FASB has shifted its focus to serving the banking industry insiders, and not the general public and investment community who rely on the board to apply fair standards.

The letter can be reviewed here: http://www.hussmanfunds.com/wmc/wmc110228.htm

Former FASB Chair Herz Steps Into Private Sector

May 12, 2011 by · Leave a Comment
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(FASB) has stepped into the private sector as senior advisor at WebFilings, a company that provides technology for SEC financial filings. The technology startup, based in Palo Alto, CA and Ames, IA, also lists Eugene S. Katz, a retired partner and board member at Herz’s old firm PricewaterhouseCoopers, as a member of its senior advisory board.

Herz, who abruptly retired last autumn two years before the end of his term at the FASB, is best known for controversial proposals to accounting standards, most notably his proposal to require that financial instruments such as bank loans be reported at fair value. The FASB, now chaired by Leslie Seidman, has taken a more accommodating approach due to significant public comment against Herz’s proposal.

Even in the private sector, Herz remains very interested in accounting policy. His desire to streamline the process using technology is well noted. “I’ve long been an advocate of making better use of technology in the financial reporting process,” Herz said in a statement. He continued, “The WebFilings collaborative solution is a huge leap forward for financial reporting — a pioneering technology platform that takes a holistic approach to streamlining financial reporting.”

FASB Again Retreats on Accounting Proposal

May 10, 2011 by · Leave a Comment
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In another concession to public opinion and to ease transitions and merging standards with the International Accounting Standards Board (IASB), the United States-based Financial Accounting Standards Board (FASB) retreated on a controversial proposal that would require leases to be noted on corporate balance sheets.

Acknowledging that not all leases are necessarily created equal, both the FASB and IASB may now consider two categories of leases, something that would resemble today’s operating leases and capital leases, says Tammy Whitehouse of Compliance Week. The move also backs away from a proposal that would have changed the way that companies account for renewal options leading to variable lease payments. This proposal would have required companies to do a significantly higher level of projecting lease terms and renewals, raising questions about uncertainty and undue burden on companies.

This is a similar reevaluation to the fair value proposal for financial instruments, which the FASB pulled back on recently. That proposal would have required banks and other financial institutions to report most financial assets and liabilities at fair value. Like the lease accounting proposal, overwhelming negative comments from the public and investment communities, most calling it an undue stress on companies, urged the FASB to back away from the proposal.

FASB Timeline for Convergence Delayed by Fair Value Debate

May 4, 2011 by · Leave a Comment
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One year ago, the Financial Accounting Standards Board (FASB) had set a target completion date of June 2011 for nine projects that would aid the convergence with International Accounting Standards Board (IASB) rules. The FASB has now been sending signals that this may have been an unattainable goal, targeting five projects that will adhere to this timeline, most notably fair value application of financial instruments.

The FASB originally proposed that most financial instruments be measured at fair value, noting gains and losses as a result of this application on either net income or other comprehensive income. The public comment period yielded nearly 3,000 letters – most opposed the FASB model.

Though the FASB has backed off of its fair value proposal in favor of amortized cost, revisions to accounting for financial instruments and accounting for impairment of financial instruments remain a likely area of change, as noted by Paul Munter, CPA, in his article in Financial Executive Magazine. “Closely linked to the boards’ financial instruments project are those on the projects on netting of financial instruments and derivatives and presentation of other comprehensive income,” he says. United States Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS) currently differ, and will have to be equalized before a standards conversion can happen, especially on the June 2011 timeline.

Mark-to-Market for Lending Off The Table, But Not Dead Overall

May 2, 2011 by · Leave a Comment
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The Financial Accounting Standards Board (FASB) recently rescinded its proposal to apply mark-to-market accounting to a vast array of financial instruments, an unpopular proposal from the banking industry’s perspective. But, as Bill Bradway points out in his editorial for Bank Systems & Technology, the issue is far from dead. Bradway explains that traded instruments such as actively traded loans and securities will still follow mark-to-market accounting. Loans that are held to maturity will use the amortized cost.

Generally, banks are relieved, but not free of mark-to-market entirely. Bradway explains, “Distressed real estate that is in some form of extended default (say past 90 days due) or foreclosure is still eligible for the collector’s version of mark to market. What is the property worth to a buyer?”

Bradway warns that investors will have to “raise their due diligence on banks with a meaningful basket of troubled or non performing loans.” Publicly held banks are much easier to analyze than smaller community banks in this regard, as problems on a loan portfolio level have not yet hit their default status, quickly turning the bank’s assets sour. “The broader economy will benefit simply because the biggest banks, which drive the market, will not be distracted or forced to make severe mark-to-market write downs at a critical time in this recovery’s cycle,” says Bradway.

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