The Financial Accounting Standards Board has adjusted two sensitive rules to reflect current market conditions, much to the relief of the U.S. banking sector. FASB approved a redo of its fair-value, mark-to-market rule. Under the revision, the value of assets in an airless, inactive market “is the price that would be received to sell the asset in an orderly transition (that is, not a forced liquidation or distressed sale) “between market participants at the measurement date under current conditions (that is, in the active market).”
FAS 157-e also clarifies and includes “additional factors” for deciding whether trading volume has evaporated; and eliminates the “proposed presumption that all transactions are distress (not orderly) unless proven otherwise.” In other words, banks have quite a bit of leeway in putting a value on some of those asset-backed securities stored in the containment vessel.
The accountants will also view impaired assets—Other Than Temporary Impairment—somewhat differently. Impaired debt securities reflected in earnings will be tied to credit losses rather than market losses under the rule changes.
Edward Yingling, president and chief executive officer of the American Bankers Association, praised the mark-to-market rule revision. “The guidance will allow banks and their auditors to use judgment when valuing illiquid assets,” he said in a prepared statement. He also lauded the change OTTI rules, although he said it didn’t go far enough. FASB left in place the requirement that banks report market losses for held-to-maturity securities. Those assets “should never be subject to market volatility,” according to the ABA.
“The mark-to-market change is a healthy shift,” says Ellen Marshall, co-chair of the banking and financial industry practice group at law firm Manatt, Phelps & Phillips. “Now banks can make a decision about whether to sell or hold these assets based on economic rather than accounting reasons,” she adds. The revision “should improve the balance sheets of those who took bigger charges than required under the new rules.” Marshall also welcomes rules that require banks to “pick apart the components of why assets have certain values, and a description in the footnotes, because they create greater transparency.”