The long debate over market value accounting for investment securities has entered a new phase with the publication Sept. 9 of an exposure draft by the Financial Accounting Standards Board that would require mark-to-market treatment for all but a narrowly defined set of securities. That set definitely does not include mortgage-backed derivatives.
"This wffl mean a huge change in accounting for financial institutions,' said Donna Fisher, manager of accounting policy for the American Bankers Assaciation. "It will affect 30% of banks' assets."
Fisher reiterated a complaint raised often during the debate. "It's a lopsided system,' she said. "It ignores the liability side of the balance sheet.' At one point, the staff attempted to devise a market value accounting system that included the liability side but the board dropped the effort because they found it to be too complicated.
The main threat of the market value system is the impact on the capital positions of financial Institutions. It is possible that depositor/ institution regulators, who have strongly opposed market value accounting, may calculate capital requirements under the current accounting system.
The breakthrough came July 20 when FASB reached a compromise on securities that "management has the intent and ability to hold to maturity.' Securities in that category would be reported at amortized costs. This category would not be likely to include most mortgage-backed derivatives because they typically are sold in response to changes in interest rates or increases in prepayments.
Two other categories, trading securities and securities available for sale, would be marked to market.
If adopted in final form, the rules would be effective starting in calendar year 1994.