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The Financial Accounting Standards Board on Wednesday provided additional details about proposed guidance the agency is issuing that could change how banks and other companies value illiquid mortgage assets.
At issue are controversial mark-to-market rules, an accounting methodology that requires banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset.
The new guidance would give auditors more flexibility in valuing illiquid mortgage assets that may have a long term value or strong cash flow -- in other words they are not distressed assets, but they can't be sold in the markets today.
Proponents of abolishing or modifying the mark-to-market rules, which are also known as fair value regulations, say that assets owned by troubled banks have become impossible to value, as the market for these assets have frozen up due to the financial crisis.
The FASB's proposed guidance would stop short of changing the mark-to-market rules, but it would clarify how auditors should interpret those existing regulations. It would allow banks and other companies that have had a difficult time valuing illiquid mortgage and other securities, the ability to use "significant judgment" when valuing the assets. (See details)
The proposal is dubbed "Determining Whether a Market Is Not Active and a Transaction Is Not Distressed," and is in response to concerns by banks and other financial institutions who have been concerned that the market for illiquid mortgage securities is inactive and distressed, despite their strong cash flow.
However, it's unclear whether the additional guidance would be sufficient for bank auditors to make significant changes to how they value illiquid mortgage securities.
The proposed guidance is open to a 15-day comment period until April 1. The FASB five member board will vote on the new proposed guidance on April 2. If approved, the new guidance would be in effect in time for companies to use the guidance in their first-quarter 2009 financial statements. FASB is based in Norwalk, Conn.
Agency details new mark-to-market guidance - MarketWatch
At issue are controversial mark-to-market rules, an accounting methodology that requires banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset.
The new guidance would give auditors more flexibility in valuing illiquid mortgage assets that may have a long term value or strong cash flow -- in other words they are not distressed assets, but they can't be sold in the markets today.
Proponents of abolishing or modifying the mark-to-market rules, which are also known as fair value regulations, say that assets owned by troubled banks have become impossible to value, as the market for these assets have frozen up due to the financial crisis.
The FASB's proposed guidance would stop short of changing the mark-to-market rules, but it would clarify how auditors should interpret those existing regulations. It would allow banks and other companies that have had a difficult time valuing illiquid mortgage and other securities, the ability to use "significant judgment" when valuing the assets. (See details)
The proposal is dubbed "Determining Whether a Market Is Not Active and a Transaction Is Not Distressed," and is in response to concerns by banks and other financial institutions who have been concerned that the market for illiquid mortgage securities is inactive and distressed, despite their strong cash flow.
However, it's unclear whether the additional guidance would be sufficient for bank auditors to make significant changes to how they value illiquid mortgage securities.
The proposed guidance is open to a 15-day comment period until April 1. The FASB five member board will vote on the new proposed guidance on April 2. If approved, the new guidance would be in effect in time for companies to use the guidance in their first-quarter 2009 financial statements. FASB is based in Norwalk, Conn.
Agency details new mark-to-market guidance - MarketWatch
