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

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.”

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.

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.

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.

The FASB’s recommendation is to fair value all assets on the balance sheet.

This is an incredibly bad idea. This will lead to an increase in asset repricing frequency, which leads to a short term holding mentality. Banks will hesitate to lend long-term if they know that shortly after they make a loan, they could be forced to mark the loan down to its “market value.”

Going hand in hand with this is that short-term market value write-downs – on long-term assets – will decrease capital at banks, which will in turn decrease their capacity to lend.

We want longer management of longer term assets. Let financial institutions carry assets at whatever level they fully disclose, and force them to footnote the “market value.” Full disclosure will provide investors with all of the information they need to make decisions. This improves disclosure and transparency without draining capital out of the banking system.

Comments on FASB Recommendation – www.FASB.org