Last month the Financial Accounting Standards Board changed is mark-to-market accounting rule and its approach to other than temporary impairment (OTTI), under pressure from a Congressional deadline. In short, the FASB staff granted financial institutions more discretion in applying mark-to-market standards to assets caught in illiquid markets, and allowed impaired debt securities reflected in earnings to be tied to credit losses instead of market losses. The financial sector welcomed these changes, but considered them half-measures, and they continue to press for more.
A bevy of financial-sector groups made this clear in a letter delivered last week to Rep. Barney Frank (D-Mass), chairman of the House Committee on Financial Services and Sen. Spencer Bachus (R-Ala.) ranking member of the committee. The American Bankers Association joined the American Council of Life Insurance, the American Insurance Association, the Council of Federal Home Loan Banks, and the Financial Services Roundtable in amplifying their reservations about mark-to-market and OTTI accounting rules. While praising the FASB for moving “expeditiously as the Committee requested,” the letter complained that the “changes only scratched the surface.”
While OTTI accounting has been liberalized, it “continues to result in higher losses for U.S. companies versus companies that follow international accounting standards and may unintentionally increase the number of bonds that become subject to an OTTI charge,” according to the letter.
But the groups save their most intense criticism for FASB’s mark-to-market approach. The modifications announced last month “provide more specific guidance, which is useful for more consistent application of the rules,” and that’s a good thing. But the core problem was not addressed. In the end, market-to-market accounting “does not provide the most relevant measurement basis for many types of transactions, ABA and the others wrote. The rules ought to follow the business model. Mark-to-market is appropriate for cash flow based on assets firms expect to sell, but not for cash flow based on assets firms expect to hold.
Not only that, the “exit price” definition of fair value “gives no consideration to what price a seller is willing to accept,” resulting in a “downward bias in reported values,” the letter states. Although the groups don’t explicitly call for Congressional pressure, they praised the “bipartisan efforts we have witnessed on these issues.” With the FASB expected to vote momentarily on another hot potato—eliminating the rule allowing “qualified special purpose entities” (many of them considered toxic assets) to be held off balance sheet—can another visit to the House committee by FASB chairman Robert H. Herz be ruled out, perhaps before summer recess?