An American Council of Life Insurers committee head today asked federal securities and accounting regulators to respond to the economic crisis by rethinking the current asset accounting system.
“We believe this standard needs to be revised, not just interpreted,” said Brad Hunkler, the controller for Western & Southern Financial Group Inc., Cincinnati.
But a second life insurance industry representative called for changing implementation of the current fair market value and “mark to market” asset accounting rules, and a third emphasized the need to proceed cautiously before making major changes.
The life industry executives were participating in a roundtable discussion on U.S. Generally Accepted Accounting Principles fair market value accounting requirements organized by the U.S. Securities and Exchange Commission.
The Financial Accounting Standards Board, Norwalk, Conn., established the current U.S. GAAP fair market value accounting rules in Financial Accounting Statement 157, which was released in 2006 and took effect for public company fiscal years starting after Nov. 15, 2007.
The FAS 157 fair market value accounting rules require publicly traded companies to adjust net income figures and other financial statement figures to reflect the current market values for some types of assets, such as derivatives and securities held for trading.
In the past, public companies could use “historical cost accounting” and, in most cases, use the purchase price as the value of the assets, unless they recognized a permanent change in the value of the assets.
Some experts, including insurance company executives, say mark-to-market accounting is causing dramatic fluctuations in bank and insurance company asset values, net income figures and net worth figures that would not have occurred under the old, historical cost accounting rules.
Hunkler, chairman of the GAAP committee at the ACLI, Washington, said the rules also are causing dramatic differences in the way insurers account for whole mortgages and the way they must account for securities backed by the same mortgages.
Fair value reporting belongs somewhere in company financial statements, but “I’m not sure it belongs in the balance sheet and the income statement,” Hunkler said.
Fair market value sounds good, but, in the real world, when markets are inactive, companies have been getting value estimates from brokers that use a “black box” valuation approach and may have an incentive to quote the lowest possible prices, Hunkler said.
It could be that fair value figures belong in the footnotes, or some other section of a financial statement, Hunkler said.
Scott Evans, an executive vice president in the asset management operations at Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, said regulators should simply offer additional guidance to help companies make better use of the FAS 157 rules, to let companies make more use of judgment when determining what the fair market value of assets really is, and to make adjustments if a temporary cash crunch or temporary market chaos are temporarily depressing prices.
“Management and its auditors should attempt to determine what the market would pay [for an asset] on the statement date,” Evans said. “If that number is volatile, that number is volatile.”
But managers should use their judgment to come up with reasonable asset valuations, not necessarily accept a low-ball market price simply because that would be the only price that a dysfunctional market could provide, Evans said.