The Financial Accounting Standards Board, under considerable pressure to alter the fair value accounting rules blamed for exacerbating the woes of the financial sector, has proposed more leeway for banks in determining the value of distressed assets. FASB Chairman Robert Herz said that the agency may allow companies to use "significant judgment" in valuing assets as part of the revised fair value, or the so-called mark-to-market, accounting rules. The implementation of any change could come in time to allow financial companies to employ the new rules for their current-quarter financial statements. Herz said the board is set to vote on the proposal April 2 after a 15-day public comment period, according to Bloomberg.
Many financial institutions have long complained about the FASB's statement 157, which was implemented in 2007 to change the definition of fair value -- the measure of the worth of an asset on a company's books -- along with the methods used to determine fair value. The mark-to-market rules have led to assets being priced well below their real valuation in some cases, making it impossible for banks to purge the toxic assets from their books at anything but fire-sale prices. Several policymakers and financial firms have called for a change to the accounting rules. Bank of America ( BAC) CEO Ken Lewis told a group in Boston last week that any changes to the mark-to-market rules would provide relief. House Financial Services Chairman Barney Frank (D., Mass.) has also been a vocal proponent of changes to the regulations, arguing last week that the FASB needs to move quickly to address concerns.
Others argue that mark-to-market rules have certain advantages, such as accurately revealing the extent of problem assets and deteriorating financial conditions at struggling institutions. Those in favor of the current rules say any alteration to FASB 157 would enable institutions to improperly avoid or delay the recognition of economic losses and depleted capital. During a hearing on Friday before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, FASB's Herz testified that fair value accounting "helps provide the transparency and comparability that are vital to investor confidence. "That is not to say that fair value is perfect or is the universal panacea," Herz added. "There are many challenging issues, particularly in illiquid markets. Mark-to-market works best in sound, active, liquid markets. Therefore, while it is in our collective interest to try to keep improving disclosures about and techniques for valuing items in illiquid markets, it also would be worthwhile for policymakers and regulators to take steps necessary to create sound markets." Financial stocks were rallying Monday amid a flurry of news. Citigroup ( C) jumped 33.7%, Bank of America was higher by 13.4%, Wells Fargo ( WFC) gained 7.7%, and JPMorgan Chase ( JPM) was rising 5.2%.