Accountants eyeing bankers' rose-colored glasses

Wed Apr 7, 2010 8:02pm EDT

* Proposal due within weeks on financial instrument acctg.

* FASB, IASB trying to reconcile views

* Proposal will be reconsidered in the fall

By Emily Chasan

NEW YORK, April 7 (Reuters) - Two top accounting rulemakers on Wednesday said they still plan to focus on transparency over stability just weeks before proposing a new rule that could change the way banks value loans on their books.

International Accounting Standards Board Chairman Sir David Tweedie and U.S. Financial Accounting Standards Board Chairman Robert Herz said on Wednesday that they expect to issue a controversial proposal in the next few weeks that could change how banks value the loans on their books.

The proposal on financial instrument accounting would be open for public comment and considered with other proposals about how management views credit impairments more formally in the fall, they said.

"Loans had been a major problem in the (Savings & Loan) crisis and one of the major problems in this crisis as well," Herz said in comments to The Japan Society, at an event in New York.

The accounting rulemakers have faced pressure from banks and politicians over the past year to incorporate economic stability concerns into their accounting rules, especially as banks have been wary about taking any further write downs on distressed loans.

"Politicians have been saying a major objective of financial reporting is stability -- we think it's transparency," Tweedie said.

The question of how banks should value financial instruments has been subject to stark debate among accounting rulemakers over the last few months. The IASB had proposed to have those assets valued at "amortized cost," which would mostly provide information about expected cash flows, while the FASB suggested all financial instruments should be valued at market levels. Valuing loans at a market rate would be a significant expansion of mark-to-market accounting, which has been vehemently opposed by the banks.

The FASB and IASB have been working over the last few months to come up with a reconciliation for their views.

Herz said that in the fall, the boards would also look at "issues related to management's estimates of credit impairment, which traditionally have been done with a fair degree of rose-colored glasses particularly in downcycles."

Banks have drawn criticism over the course of the downturn for overleveraging themselves, and more recently for granting "amend and pretend" or "delay and pray" extensions and waivers to troubled borrowers that some think could extend the crisis.

Herz said the boards were hoping to get "robust input and comment" on their proposal, particularly on implementation issues, and concerns about how it would intersect with bank regulatory capital requirements. (Reporting by Emily Chasan; Editing by Lisa Shumaker)

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