The Financial Accounting Standards Board (FASB) decided at its August 13 meeting to move ahead with a proposal to extend mark-to-market accounting (FAS 157, Accounting for Fair Value) to loans and other securities. The FASB is expected to release a formal proposal, or "exposure draft", on the changes in the first half of 2010, Reuters reports.
The standards board, which appeared to bow to the will of Congress and the banking industry in April when it permitted banks to exercise “significant” judgment in their valuation of traded securities, has taken a tough stance by proposing to apply mark-to-market principles to loans.
FASB’s current rules let lenders carry most of the loans on their books at historical cost, by labeling them as held-to-maturity or held-for-investment. Loan losses are recognized only when management deems them probable, although losses may be foreseeable, according to an analysis of the proposal in Bloomberg.com. Applying current market values to loans could speed up the recognition of loan losses, resulting in lower earnings and reduced book values. While the proposal makes the balance sheet presentation simpler, it would involve complex changes in the income statement.
FASB Chairman Robert Herz said at the meeting the FASB has a long process ahead of it and did not expect real changes to be in place before 2011. FASB is working with the International Accounting Standards Board (IASB), on a “comprehensive” plan for presenting financial instruments, Herz said. “We’ve got a lot more work to do.”
IASB has proposed allowing companies to continue carrying many financial assets at historical cost, including loans and debt securities,
Response to FASB’s proposal aroused heated reactions from the banking industry.
"What the accounting boards are discussing now would be the biggest accounting change we've ever seen", said Donna Fisher the American Banking Association’s senior vice president of tax, accounting and financial management in a press release. "We are deeply concerned that the shortcuts being taken will result in flawed or inconsistent rules."
ABA expressed concern in their statement that the standard setting process is being compromised, partly because IASB's timeline for completion may not allow U.S. companies to have a chance for appropriate due process in providing input.
Brian Wesbury, chief economist at First Trust Advisors LP in Wheaton, Illinois used more colorful language speaking to Bloomberg.com.
“Like a horror flick monster that just won’t stay dead, FASB’s accountants are proposing to expand the application of mark-to-market accounting rules across the board to include all financial assets, including regular loans,” Wesbury said.