The Financial Accounting Standards Board has issued its final staff positions on changes in its mark-to-market/fair value accounting rule, providing financial institutions more discretion in applying mark-to-market standards to assets caught in illiquid markets. The FASB received more than 600 comment letters, “many emails, and held many face-to-face meetings and other discussions with a broad range of affected constituents,” according to FASB chairman Robert H. Herz.
The final amendments “include a number of new disclosures relating to the determination of fair value and to estimated credit losses and credit exposures,” Herz says in a prepared statement. Fair value disclosures for assets held off the balance sheet must now appear on a quarterly basis rather than annually, along with “qualitative and quantitative information about fair value for all those financial instruments not measured on the balance sheet at fair value,” the FASB states. Changes in the Other Than Temporary Impairment standards were also finalized. Impaired debt securities reflected in earnings will now be tied to credit losses instead of market losses, but the “measure of impairment in comprehensive income remains fair value.”
Edward L. Yingling, president and chief executive officer of the American Bankers Association, says the shift in the mark-to-market rule “will help provide a more realistic picture of losses,” but he encourages the FASB to “make greater use of economic values rather than market values.” Use of mark-to-market practices should be restricted to short-term trading activity, according to Yingling. “Traditional banking typically involves accepting deposits and making loans rather than active buying and selling.”
The final changes were praised by others in the financial sector, too. Pluris Valuation Advisors president Espen Robak, an early opponent of a de-emphasis of the mark-to-market approach, praises the results. “You can’t just blindly take the last trading-day price and apply it,” he says in a prepared statement. And he says the increased disclosure requirements “will ensure that investors can review financial statements with confidence in the numbers they’re looking at.”
