Fair Value Guidance to Go Live FASB nips and tucks its FAS 157 guidance for quick release so companies can use the clarification to file third-quarter results. Marie Leone - CFO.com | US The Financial Accounting Standards Board will likely issue final guidance on fair value accounting by Monday. The board is working today and perhaps over the weekend to tweak some of the language to clarify how assets in illiquid markets are valued. FASB decided to rework two sections of the draft document that was put out for public comment one week ago â but stuck to its guns regarding mandating companies to use significant judgment when valuing financial assets in inactive markets. The guidance clarifies items contained in FAS 157, the accounting rule that governs how to measure assets and liabilities using the fair value method. FAS 157 provides a measurement hierarchy that outlines ways to value securities depending on how liquid they are. Regularly traded securities are valued on their selling price, whereas securities that are thinly traded or in illiquid markets have a different set of inputs. In practice, however, many experts suspect that banks and financial institutions gave undue weight to the last observable selling price of their securities before the markets froze completely. The FASB staff will slightly rework the language that defines an inactive market, but will stop short of giving a "bright line" definition. FASB chairman Robert Herz commented that the definition will explain that owners of financial instruments will be required to drill down to the asset level â as opposed to just assessing the market â to determine whether the market for that instrument is active. Further, FASB member Thomas Linsmeier added that the language should clarify that determining whether a market is inactive "is a matter of judgment" and that the guidance should include some factors that financial statement preparers may want to consider before making that decision. Similarly, the FASB staff will tidy the language that describes a distressed sale. FAS 157 requires that owners of financial instruments value the instruments according to what price the asset will fetch in an orderly market â not in a forced liquidation or distressed sale. If the transaction being used to mark the asset to market is a distressed sale, then the owner is permitted to consider other factors â including management's internal estimates â when valuing the asset. In the new guidance, FASB will emphasize that the transaction, not the market, must be distressed to allow companies to consider factors other than price. Indeed, "orderly" transactions can take place in a distressed market, as is the case currently, noted FASB member George Batavick. The guidance must make clear "the difference between distressed transactions and distressed markets," he asserted. "This is the most difficult aspect of writing the [guidance] because we are trying to [instruct preparers to] exercise judgment over transactions that are few and far between," noted Lawrence Smith, a FASB member. However, Smith was adamant, as was the entire five-member board, that the asset owner must stay focused on the transaction when using fair value accounting. "[Preparers] cannot dismiss market prices just because that market is dislocated," nor can they "automatically inject any old price into a dislocated market. You will have look at other data," opined FASB member Leslie Seidman. While the guidance includes an illustrative example of how to apply the new guidance, Smith offered his own example of how judgment figures into fair value acccounting even when an observable price is available. In Smith's example, an asset owner wants to value a financial instrument that has dropped in price because the market for it has dried up. The owner looks to three comparable transactions, but notices that the range of prices among them is very wide. Smith contrasts that scenario with one in which the three reference transactions have a very narrow price range. He explains that while both examples include observable inputs, significant judgment is required on the part of the owners in the first scenario to determine which of the trio of prices reflects the appropriate fair value. How would Smith value an instrument that has only one reference transaction? "I would look at underlying data," he insists. For a loan that was secured by mortgages, for example, Smith would want to examine default rates and the population holding the mortgages. "It's not easy. We are saying that a lot of judgment is required and that people will have to dig further when there are situations in which transaction prices don't make sense," he says. FASB received more than 90 comment letters within a one-week span referencing the new guidance. The letters, from corporations, investors, academics, regulators, accounting firms, and industry trade groups, wanted the board to zero in on the subject of judgment and better explain how, in FASB's hypothetical example, the company came up with its final estimate after taking all factors into account. Other commentators have used the proposal as a way to vent their frustration and plead with the board and the Securities and Exchange Commission to revisit the practicality of mark-to-market accounting. Under the $700 billion bailout package signed by President Bush last week, the SEC has the power to suspend mark-to-market accounting. In addition, some letters asked for more time to implement the new guidance. But at today's meeting, the board refused to extend the implementation date, noting that the guidance would be effective upon issuance â which could be later today. For calendar-year companies, the guidance would likely affect how financial assets are valued in third-quarter financial statements, if companies have not already issued results for that period. The guidance will not address how to measure liabilities at fair value, but Herz and others members hope that some "common sense" will prevail with regard to that issue. FASB members reckoned that the fair value of liabilities will be measured in much the same way as assets, but mention of that specific concern will likely be relegated to a different guidance document. Despite FASB's efforts to finalize the guidance as soon as possible, the board acknowledged that additional guidance may be needed to respond to the Treasury Department's program to buy up toxic mortgage assets. Treasury officials are working to figure out which mortgages will be eligible for the program, and at what price they will be bought. Some officials estimate that the so-called TARP (troubled assets relief plan) will be finalized within two weeks. FASB expects that it will have to address issues of how to measure TARP-related asset price and associated disclosures once the plan's details are issued.
FASB rushes to get revised fair-value guidance out on Saturday Why? Because tweaked guidance on valuing assets could boost third-quarter earnings for some companies By Marine Cole October 10, 2008 2:05 PM ET The Financial Accounting Standards Board adopted new guidance on fair-value accounting in illiquid markets today, giving financial institutions more leeway to valueg financial instruments based on internal inputs. The board will release its final guidance Saturday, and it will be effective upon issuance. âI think itâs safe to say when we wrote [Financial Accounting Standard 157 on fair-value accounting], we probably didnât contemplate exactly the current situation thatâs developed in the credit and financial markets,â Robert Herz, chairman of FASB, said during todayâs meeting. âUnder such conditions, itâs important to understand and apply both the objective of 157 and the framework,â Mr. Herz said. âBy doing that, it will require in some cases more analysis, more judgment.â In late September, FASB and the Securities and Exchange Commission issued a joint clarification allowing companies to use more internal inputs, related to future cash flow, for instance, when markets are inactive and it is difficult to find trading prices. FASB issued a proposed staff position on Oct. 3 clarifying the application of FAS 157 on fair-value measurements in an inactive market by providing an illustrative example. In a week, FASB received more than 100 comment letters from preparers, consulting firms, academics, individuals, regulatory bodies and accounting firms. Some expressed concerns as to whether fair value is the most accurate measurement method in markets that arenât active. A number of the letters indicated uncertainty about how to determine whether a market is active or not. FASB is hurrying to get the guidance out the door so filers can apply it to their third-quarter results. Earlier this week, Robert Willens, a corporate tax and accounting consultant and former managing director in Lehman Brothersâ equity research division, wrote that, with FASB and the SEC having acknowledged that markets are now largely inactive, âthe use of unobservable inputs for the purpose of valuing many securities ought to proliferate.â Thus, Mr. Willens noted, âit would not be surprising to see third-quarter earnings reports show marked improvement from past periods as the values derived from âmark-to-modelâ assumptions exceed those resulting from the use of observable inputs, in such prior periods, with respect to the same securities.â
U.S. authorities seek to clarify mark-to-market rules By Rex Nutting, MarketWatch Last update: 2:03 p.m. EDT Oct. 12, 2008 WASHINGTON (MarketWatch) -- The U.S. Financial Accounting Standards Board issued a clarification late Friday of its mark-to-market accounting rules that could allow financial firms to value some illiquid assets higher than those assets could sell for in the current distressed markets. The FASB ruling amplifies a statement it released with the Securities and Exchange Commission on Sept. 30, with examples of how companies should use their best judgment to value assets that have no active market. "Determining fair value in a dislocated market depends on the facts and circumstances and may require the use of significant judgment about whether individual transactions are forced liquidations or distressed sales," Friday's FASB statement said. "In determining fair value for a financial asset, the use of a reporting entity's own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available," it said. Read full FASB position statement: http://www.fasb.org/pdf/fsp_fas157-3.pdf Many critics of mark-to-market accounting rules say banks have been weakened by the requirement to significantly write down the value of some assets. However, the latest ruling by FASB is not a complete rejection of mark-to-market that many companies, trade groups and politicians have been seeking. Rex Nutting is Washington bureau chief of MarketWatch.
Banking Group Assails New FASB Mark-To-Market Guidance (Updates with background and ABA comments from letter) By Mark H. Anderson Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- The American Bankers Association on Monday asked the Securities and Exchange Commission to override recent guidelines from the U.S. Financial Accounting Standards Board, or FASB, on mark-to-market accounting, saying the U.S. accounting standards changes are insufficient. "We realize that we are requesting extraordinary action by the SEC," the ABA said in an Oct. 13 letter. "These extraordinary and difficult times call for such prompt and extraordinary action." The FASB released a circular on Friday that follows up on a joint SEC and FASB announcement from Sept. 30 that said the accounting standards board would issue guidance on fair-value accounting rules, also known as "mark-to-market" accounting, in cases where markets are frozen or prices are unreliable. The ABA said it believes the FASB's action on Oct. 10 "basically ignores what we believe to be the intent of the SEC's release." The group also said "the accounting guidance is too narrow and too complex to be used by either large or small banks." The banking group accused the FASB of ignoring its mandate on the issue. "It apparently still refuses to recognize the realities of the current situation," the ABA said. The banking industry's push on fair-value accounting rules comes as a number of lawmakers in Congress have pressed the SEC separately to suspend mark-to- market accounting rules as one of the government responses to the financial crisis. Rep. Spencer Baucus, R-Ala., ranking Republican on the House Financial Services Committee, has requested hearings on the subject. The ABA letter said the FASB guidance continues to require that companies include in their valuations a measure of liquidity risk in cash flow calculations. "This requirement brings the guidance full circle back to distressed sale values. The use of distressed sale prices neither represents genuine fair value nor provides useful information." The ABA wants the SEC to override the FASB guidance from Oct. 10 and replace it with new guidance that clarifies that forced or distressed sales don't have to be included in fair value during an illiquid market. The banking group also wants a proposal on accounting for securitizations to be suspended and wants the SEC to suspend all other projects impacting fair-value accounting until Congress conducts a study required by the $700 billion Wall Street rescue package.
SEC Clears U.S. Banks to Delay Writedowns on Some Securities http://www.bloomberg.com/apps/news?pid=20601087&sid=a9j2yBiYzkJk&refer=home and the US banks say Arigatou
Come on - that's a perfect example of the entire US financial system: a veneer of bullshit and accounting gimmicks covering a mountain of unsustainable debt.
Can anyone who doesn't like MTM explain the logic behind letting 2 firms holding identical portfolios report different values on their balance sheets just because they bought them at different times? What the hell is that? I am guessing historical cost with some subjective impairments is the basic alternative to MTM - is that right?