Change in Mark-to-Market Rules Coming Soon

Credit Union Journal
March 19, 2009 | COMMENTS

Accounting rules-setters assured Congress yesterday that changes to the much-reviled rules over mark-to-market accounting are well on their way, offering much-needed relief for credit unions and other financial institutions.

The head of the Financial Accounting Standards Board said it plans to approve new guidance for valuing impaired assets; how to value assets in inactive markets and what values should be applied in distress sales by the end of the month. "We have announced a number of actions around more guidance on valuing inactive and illiquid markets," Robert Herz, chairman of the five-member panel, said yesterday during a hearing on mark-to-market accounting before the House Financial Services Committee.

In a rare show of consensus, lawmakers from both the Democrats and Republicans agreed that FASB should amend the rules on mark-to-market, also known as fair value accounting, to recognize the vast diminution in value of assets, particularly mortgage-backed securities, derivatives, and other financial instruments.

The FASB, though, is an independent trade association that sets rules for generally accepted accounting principals, or GAAP, which all financial entities and businesses must follow, and is under no obligation to obey congressional wishes, unless enacted into law.

Lawmakers threatened to rein in the FASB's independence if it does not act to relieve some of the stress caused by mark-to-market. "Just get it done. Stop dithering. Don't make us tell you what to do," said U.S. Rep. Michael Capuano, D-Mass.

Herz promised fast action. In response to a question from one committee member, he said he believes the FASB could act as soon as in three weeks, by the end of the first quarter. That time frame was repeated several times.

Mark-to-market is widely blamed for much of the troubles in the corporate credit union system, where U.S. Central Federal Credit Union and seven other corporates have recorded almost $18 billion in market-value losses on their books, rendering several of them insolvent.

When one committee member asked FASB's Herz how soon financial regulators could adopt any changes to the rules, Herz said because the regulators already require adherence to GAAP, the changes would apply immediately after they are voted by the full FASB.

Herz said he hopes the new guidance would encompass some of the weaknesses that have been targeted in mark-to-market. For instance, he believes some auditors rely too much on the last trade of a security in determining its market value–even if there is no active market for the security. For another, there is no standard way, such as an organized market, for things like mortgage-backed securities, derivatives, and other over-the-counter traded instruments.

In some cases, said the FASB chief, auditors should weigh cash flows more in establishing a value.

This article appeared at www.cujournal.com and is reprinted with permission.