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Mark-to-market is worth the trouble, rulemakers say
October 23, 2008 / 12:23 AM / in 9 years

Mark-to-market is worth the trouble, rulemakers say

NEW YORK, Oct 22 (Reuters) - Mark-to-market accounting may be imperfect, but alternatives that let banks mask the impact of changes in their asset values are far worse, two top accounting rulemakers said on Wednesday.

In their recent attempts to rescue the financial markets, lawmakers around the world have come down harshly on mark-to-market, or fair value accounting, which requires companies to put current market values on their financial assets.

Suspending fair value rules entirely and reverting to some other system would be a mistake, the accounting rulemakers said.

“It’s a lousy system, but it’s less lousy than any other system we’ve had so far,” Tom Jones, vice chairman of the London-based International Accounting Standards Board, said of fair value accounting.

“When there isn’t an illiquid market I think fair value does capture reality,” Jones said in comments to a New York Society of Securities analysts on Wednesday. “I can’t think of any other system that does.”

Jones’ comments echoed those of Financial Accounting Standards Board Chairman Robert Herz, who said fair value should not be so easily dismissed.

“The idea that a down market’s assets should be written down has been a fundamental concept in accounting for a century or more,” Herz told the audience.

“There are clearly issues with fair value, particularly in illiquid markets ... But what are the alternatives? To use original cost or some other smooth value that ignores current market conditions?”

Herz likened a move away from fair value to a broker sending his client a monthly statement with historic, rather than current market values, or a family asking a bank for a loan without listing the current value of their assets.

“If you were looking to get a loan nowadays, what values would the bank put on your assets? ... Would it be the value you are hopeful of getting in a better economy or the future? I doubt it,” Herz said.

Critics of mark-to-market accounting have said the accounting rules forced billions of dollars worth of writedowns at banks, creating a downward spiral where each writedown provoked further writedowns and froze up the markets.

But historic cost, average cost, or any other cost bankers would like to record is not better than their best guess of current market value, Jones said.

“I don’t think you want to know what someone paid for an investment two years ago, you want to know what it’s worth today,” Jones said.

The FASB and IASB have acted this month to try to fix some issues with fair value, particularly in inactive markets.

Earlier this month the U.S. Securities and Exchange Commission and FASB jointly agreed that banks could rely more on internal estimates, rather than fire-sale prices, to value assets trading in illiquid markets. A few days later the IASB also said European could take a less damaging option for valuing assets they intend to hold rather than sell.

But that change has not stopped bankers and politicians pushing for further changes. As part of the $700 billion bailout bill, the SEC was required to study fair value and given specific authority to suspend the rules if it chooses.

The American Bankers Association has also asked the SEC to override FASB’s rules on mark-to-market accounting. (Editing by Gary Hill)

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