The Financial Accounting Standards Board has posted two drafts of guidance that could ease the effect of mark-to-market accounting rules.
One, FASB Staff Position FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, would establish guidelines that banks, insurers and other entities with “hold-to-maturity” securities could use to decide when to use actual market prices and when, in times of market turmoil, to shift to other methods of valuation, such as valuations based on estimates of the present value of future cash flows.
The other draft guidance, FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments, would explain how reporting entities should go about recording losses on troubled securities.
Written comments on the drafts are due April 1. FASB, Norwalk, Conn., expects to vote on the drafts at a board meeting April 2.
If approved, both staff positions would apply to “interim and annual periods” ending after March 15, including the first quarter of 2009, FASB says.
Mark-to-market rules require holders of some categories of securities to try to use the current market value of the securities, rather than the purchase price, in financial statements.
Executives at banking trade groups and many financial services companies, including life insurers, have complained that mechanical use of mark-to-market principles leads to unrealistically low valuations during times when temporary crises disrupt markets.
Defenders, such as officials at FASB and the U.S. Securities and Exchange Commission, contend that an “unrealistically low” price obtained in a free but disrupted market does reflect the true current market value of the security.