The FASB's latest idea, however, if seen to completion, would go a long way toward silencing accusations that the rulemakers have gone soft on banks.
Under consideration: an unprecedented proposal to vastly widen the use of mark-to-market accounting, so that it becomes the default method for valuing financial instruments, including loans that banks plan to hold to maturity. If adopted, the rule could set off a new wave of writedowns at a time when investor confidence in banks is fragile at best.
Proponents say that stricter use of mark-to-market would simplify accounting rules and give investors a clearer picture of companies' financial health. The opposition, led by the bank lobby, says it is unfair to make companies absorb the blow of falling market values for loans they have no intention of selling. And they say that new questions would be raised as to how to value specialty loans and other assets for which there are no ready markets.
Debate on the issue has been relatively muted because the FASB has not yet initiated its formal process for considering new rules. But a July board meeting gave observers the most detailed look yet at the ideas being floated, and the topic is on the agenda again for a FASB meeting scheduled for Thursday, when a formal proposal may get hammered out.
The American Bankers Association is trying a nip-it-in-the-bud approach, publishing a position paper earlier this month and sending a letter to accounting standards-setters in advance of an official public comment period.
"What they're discussing now would be the biggest accounting change we've ever seen," said Donna Fisher, the ABA's senior vice president of tax, accounting and financial management. "If you wait too long, then everybody is wed to their positions, so we really need to start early."
The desire to redraw the rules on valuations predates the financial crisis, with the FASB and its counterparts at the International Accounting Standards Board discussing the topic at two joint meetings in 2005. But the crisis heaped new attention on the issue, with the mark-to-market methodology currently in use alternatively criticized as a dangerous catalyst for the financial system's disarray or a convenient scapegoat for it.
In April, the FASB issued new guidance on determining whether a market is active, and increased the flexibility companies have for valuing illiquid assets. At the same time, the board allowed banks to separate credit writedowns from market writedowns when accounting for other-than-temporary impairments to assets, requiring that only the credit portion of the loss be subtracted from earnings.
That action, which critics of the FASB took as a sign that the board had caved in to pressure from financial industry lobbyists and their allies in Congress, sought to answer some of the questions about when and how mark-to-market valuations ought to be applied. The latest proposal would seek to clear up the "when" question, with companies potentially instructed to use mark-to-market for nearly every financial asset on the books. But questions about how to apply valuations remain.
"If the FASB is going to move to requiring that every instrument be marked at market value, it's going to require a lot more specific guidance for companies and auditors as to what to use for the market value in different situations," said Brian Bushee, an accounting professor at the University of Pennsylvania's Wharton School. "Most companies might not be opposed to [using] market value if they had confidence that a true market value was showing up on the balance sheet."
