The Financial Accounting Standards Board (FASB) ruled today that financial firms in the US would be permitted to avoid the strict interpretation of the fair-value rules when placing a value on their assets. Fair-value accounting – also known as mark-to-market accounting – requires companies to record their assets at the current market price when producing quarterly reports.
Financial firms – together with some members of Congress – have lobbied for a loosening of the fair-value rules. Supporters claim that forcing companies to mark securities held by the banks – including mortgage-backed securities that presently have no real market value – severely penalizes some firms at the expense of others. With today’s ruling, the FASB will allow companies to use “significant” judgment to determine a value for these distressed assets.
Reaction on Wall Street was immediate – financial sector shares rose with Bank of America leading the way with a gain of almost 7 percent by mid-day trading, followed closely by Citigroup posting a 6.3 percent increase and JPMorgan Chase & Co. climbing 2 percent. One analyst stated that the change could allow some banks to trim their losses by more than 50 percent but the ruling is not without its detractors – even some banks don’t agree with the ruling.
The main complaint is that the FASB – supposedly an independent organization charged with establishing and monitoring accounting standards and principles – appears to have abandoned a fundamental requirement due to political and corporate pressure. In a world where everything is carefully measured and monitored in order to ensure the integrity of reporting standards, firms now have free reign to arrive at their own pricing model for their assets thereby throwing the validity of their reports into question.
