Accounting rule makers approved altering controversial mark-to-market accounting guidelines on Thursday to give companies more flexibility when they value assets.
The Financial Accounting Standards Board said it will give companies greater latitude to determine the “fair value” of assets. Mark-to-market had been widely criticized in recent months by the financial-services industry and some market observers who said it contributed to the financial and credit meltdown last fall.
FASB spokesman Neal McGarity maintained that the board had been “responsive” to concerns, and said “our decisions rarely please everyone, but we believe we have helped market participants… with these actions.”
FASB will now let companies use “significant judgment” to value assets when those assets are trading in inactive markets under distressed circumstances.
Also, the standards have been relaxed by which companies have to take impairment charges when they take losses on their investments, particularly in cases where they plan to hold those assets to maturity or where they don’t have to sell them quickly.
Companies will now have to disclose assets valued at fair value quarterly, rather than on the current annual basis.
The changes will take effect for the second quarter of the year, though companies are allowed to adopt them for the first quarter if they have the means to do so. Retroactive changes won’t be allowed.
In the past, MTM meant that companies had to value assets based on the last trading price. In distressed markets, particularly where assets were not trading or there were just a few trades at fire-sale prices, MTM meant that those assets would have to be priced at very low levels.
Companies argued that this wasn’t a good representation of the value, particularly for assets that were being held to maturity. However, supporters of the rules maintained that they were necessary for transparency and accuracy.
FASB had already issued an opinion last fall saying that companies didn’t have to use “fire-sale” prices -- ultra-low prices usually resulting from forces sales -- when valuing assets. Still, critics kept up the pressure, leading to Thursday’s changes.
“I applaud the very important actions taken by FASB today, which has made significant progress toward addressing inaccurate asset valuations in the markets,” House Financial Service Committee Chairman Barney Frank (D-Mass.) said in a statement. “The FASB believes the rule can be applied more fairly and take into account the currently dysfunctional state of some markets. The integrity of the standard-setting process is preserved, while avoiding the pro-cyclical effects of improper valuation practices.”
Still, industry support for the changes was tepid.
“Today’s decision should improve information for investors by providing more accurate estimates of market values,” said Edward Yingling, president and CEO of the American Bankers Association, in a statement. But the ABA opined that FASB “has not done enough to fully repair the accounting rules for securities classified as ‘held to maturity.’”
FASB said it expects to be able to issue the final language of the changes next week.
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