Members of the Financial Accounting Standards Board agreed Thursday to change the way companies calculate asset values when markets are inactive.
FASB, Norwalk, Conn., decided to keep the objective that holders of certain classes of securities should be using the current market value, or fair value, of the holdings, rather than relying on the prices in effect when the securities were acquired,
But FASB agreed that holders can use valuation methods based on estimates of future streams of cash flow, rather than current market price data, when markets are disorderly.
The board has asked the FASB staff to develop a written draft of FASB Staff Position Financial Accounting Standard 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed.
FASB members will vote on the draft by written ballot at a later date, FASB says.
FASB critics have argued for months that rigid adherence to mark-to-market accounting rules — in some cases, driven by accountants who are afraid of being punished for providing any but the most conservative value estimates — has been forcing banks, insurers and other financial services companies to post unrealistic writedowns on the assets in their
FASB has been working on changes in the mark-to-market rules since late 2008.
Several members of the House Financial Services capital market subcommittee accelerated the process in mid-March, by threatening at a hearing to pass a bill imposing new accounting rules if FASB failed to ease mark-to-market accounting requirements within the next 3 weeks.
Rep. Alan Grayson, D-Fla., accused mark-to-market critics of wanting to “shoot the messenger” for exposing serious problems in their investment portfolios, and many investors and investor groups have written to FASB in support of mark-to-market accounting, FASB officials said during the meeting today.
During the meeting, participants compared the conflict over mark-to-market accounting to a “religious war,” and one accused financial services company regulators of shirking their own responsibilities.
Rather than asking FASB to change asset valuation rules, financial services regulators should be changing the way they handle risk-based capital minimums, a FASB member said.
FASB members made some changes to the fair value FSP draft.
One change would eliminate the proposed assumption that all transactions are distressed unless proven otherwise.
“The FSP will instead require an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence,” FASB says.
Another change would require an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the FSP and to quantify its effects, if practicable.