The release of a preliminary paper last week endorsing fair-value accounting has moved the Financial Accounting Standards Board a step closer to adopting the controversial method of valuing assets and liabilities.

Banks and the FASB have battled over the concept for nearly a decade. To the FASB, fair-value accounting is the key to unlocking the secrets of bank balance sheets, a common-sense tool that investors could use to determine the true current value of a loan, derivative, security, or deposit. Under fair value, an item's worth is equivalent to the price it would fetch on the open market.

"The goal is to report what an entity's wealth is today," said FASB project manager Ronald W. Lott.

Banks are wary of fair value. They say it makes no sense to apply the model to assets an institution plans to hold or to products for which there is no market. By and large they prefer cost-based accounting, which says an asset is worth what you paid for it.

"If the bankers could be convinced that users want fair value, and if they could understand how it was going to be used, then they might actually support it," said Donna A. Fisher, director of tax and accounting at the American Bankers Association. "That case hasn't been made."

But the FASB, a quasi-governmental entity that draws its authority from the Securities and Exchange Commission, appears to have the upper hand.

Last week's preliminary paper, which is open for public comment through May 31, might be the Norwalk, Conn.-based agency's final step before proposing a rule that would make fair-value accounting mandatory for virtually the entire balance sheet. FASB officials say they could issue the proposal as early as a year from now.

The ABA and its international counterparts have recently stepped up their efforts to forestall such a move. In October, for example, they offered to co-author a study of investors' accounting preferences with a task force of the International Accounting Standards Committee, of which the FASB is a member. They were rebuffed.

"[We do] not believe that further examination of evidence on the general relevance of comprehensive fair valuation of financial instruments, or more surveys of users, would be productive," the task force said in a Nov. 12 letter.

In a way, the future is already here. The FASB has been chipping away at cost-based accounting for years, converting one financial instrument at a time to the fair-value method. The first to go were debt securities, in 1993. In 1998, derivatives went fair value, despite bitter opposition from industry trade groups. The result is that today's bank balance sheet is a hodgepodge of values derived from fair-value, cost-basis, amortization, depreciation, impairment, and other accounting methods.

To illustrate her concerns about fair value, Ms. Fisher drew a hypothetical. Take a bank that makes a $100,000 mortgage. If the market values the mortgage at $105,000 a day later, fair value would require the bank to recognize the $5,000 gain, even if it planned to hold the loan. "If you don't intend to sell it, it doesn't make sense to have those swings moving through earnings or equity," she said.

Mr. Lott disagreed. "What's primary is: What's this thing worth? Do I believe management is making a good decision by holding it? I can't tell unless you tell me whether that gain or loss was there," he said.

Ms. Fisher predicted the FASB's preliminary paper would light a fire under bankers. "Until now, there hasn't been anything for them to respond to," she said. "I think there will be a groundswell of response."

But if the FASB's recent proposal to eliminate pooling-of-interest accounting for mergers is any indication, the industry's reaction may be anemic. When the 90-day comment period on that proposal came to a close Dec. 7, only a half-dozen banks had written in.

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