Board Loosens Accounting Rules

Eclipsed by news from the G20 Conference in London yesterday, the Financial Accounting Standards Board here in the U.S. voted to loosen so-called Mark-to-Market rules, which value distressed assets held by banks and other financial institutions. Some have argued the old rules were too tough and have saddled banks with worse bottom lines than would exist if they had be more flexible valuation standards. But others argue changing the rules to satisfy banks’ current druthers is just the kind of practice that got big institutions, such as AIG or Lehman Brothers, into trouble in the first place. The six major changes resulting from the vote are captured in these bullet points from FASB: 1. Affirm that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions (that is, in the inactive market). 2. Clarify and include additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. 3. Eliminate the proposed presumption that all transactions are distressed (not orderly) unless proven otherwise. The FSP will instead require an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. 4. Include an example that provides additional explanation on estimating fair value when the market activity for an asset has declined significantly. 5. Require an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the FSP and to quantify its effects, if practicable. 6. Apply to all fair value measurements when appropriate. Thom Senzee