Accounting & Auditing | Financial Planning | Legislative / Regulatory

FASB eases fair-value accounting rules

GavelWell, there it is.

The Financial Accounting Standards Board, reacting to Congress' "You do it or we'll do it for you" ultimatum, has approved changes in fair-value accounting rules that will give companies more leeway in how they value assets.

"The changes allow companies to use 'significant' judgment when gauging the price of some investments on their books, including mortgage-backed securities," Ian Katz reports for "Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more."

If you read this blog regularly, you already know how I feel about this. I hope the changes work, I really do. But I'm awfully, awfully skeptical.

Check out other reports from Forbes, Reuters and the New York Times. Then, be sure to listen to archived feeds of the meeting itself.

There are some interesting quotes sprinkled throughout the articles above. There's this from FASB member Lawrence Smith: “There is a perception that we are yielding to political pressure. ... We are an independent standard setter, and it is important that we maintain our independence. At the same time, how can we ignore what is going on around us?”

And this, from fellow FASB member Thomas J. Linsmeier, who voted against one of the changes. According to the New York Times, Linsmeier "complained that accounting rules already allow the 'fiction all banks are well capitalized,' adding that the changes 'will make them seem better capitalized.'”

Then there's this, from an Associated Press report about the changes written by Marcy Gordon:

"In an ironic twist, the new leeway for banks could undercut the government's new financial rescue program in which it is joining with private investors to buy up about $500 billion in toxic assets from banks, some experts say.

"In the short run, banks would benefit by raising the value of the assets. But higher values could drive away prospective private investors -- who don't like to overpay, even though the government will absorb most of the risk.

"If the assets remain on banks' books, they may continue to be reluctant to lend as they fret over the assets' future performance. That could work against the purpose of the government's program: to break the logjam in lending and get the economy pumping again."

Who's right? Will it work? I guess we'll find out soon enough.


Bill Sheridan