Add mark-to-market to the list of things you need to know about this financial crisis. After the S&L crisis and scandals at Enron, WorldCom, etc., the Financial Accounting Standards Board -- known affectionately as the FASB (Faz-bee) -- made changes to mark-to-market (or fair value) accounting to bring greater transparency to financial transactions. However, the current financial crisis has led some in the industry to rethink mark-to-market accounting. One of the concerns with this type of accounting is that requiring assets to carry a current market price (though they may have a greater future value) could push a depressed market even lower.
Groups representing accountants, institutional investors, and consumer advocates say suspending mark-to-market accounting rules is totally irresponsible and not in the best interest of investors. The Center for Audit Quality says mark-to-market accounting has helped investors understand the severity of the financial situation, but it did not create the crisis.
Financial institutions see if differently. Steve Bartlett, who heads the Financial Services Roundtable, says the accounting rule forces banks to write off assets that actually have some value, simply because there is no buyer. Today staff at the Securities and Exchange Commission and the FASB issued “clarification” on the accounting rule, stating that if an asset has an expected cash flow, that can be considered “alongside other relevant information” to determine value.
But the banking industry is lobbying for more. Many banks would like to suspend the rules altogether and want to delay for five years recording assets from banks they have acquired. Former SEC accountant Lynn Turner says that “is like a student who is given the ability to fill out their own report card each semester.”
Tomorrow the FASB is meeting to further discuss mark-to-market and fair value accounting. Not being the green eyeshade type, accounting debates don’t usually excite me; but this one should be interesting.
Comments
I retired from accounting in the mid 80's. As I recall (and please correct me if I'm wrong) corporations were screaming to have their assets recorded on the balance sheet at current market value. It looks great when prices are up.
When they drop, it looks terrible. Now they are screaming to be released from the rules they demanded 20 years ago.
Am I mistaken?
The problem with Valuation of Assets is a HUGE problem. Mark to Market or not, it is apparent that analysts who are relied upon to give values, current and/or projected don't have a clue as to what the value of stocks or financial institutions should be. Everybody is guessing and the speculators and manipulators are having a heyday. When the Glass-Steagall Act was replealed the Great Wall fell. Banking should never have been mingled with investing.
One of the biggest problems currently is that the stock market has become a lottery, or a gambling hall at best with short sellers, option traders and hedge funds running roughshod over real investors. A clear distinction can and should be made between INVESTING in a company and the activity being engaged in by the people who are driving this market up, down and all over the place. Don't these companies have a definable value? Apparently not when their value changes by 30% 40% or more in just days. This is ridiculous - but where are the Real Analysts and why can't they figure out what the value is?