Rulemakers may alter option

By Emily Chasan

NEW YORK, May 1 (Reuters) - Frustrated by news that some financial companies were trying to manipulate the adoption of a new accounting standard, the Financial Accounting Standards Board could move to amend its new fair value rules to stamp out that behavior, a board member said on Tuesday.

The rule, known as the "Fair Value Option," or FAS 159, allows companies to irrevocably choose to record the value of a financial instrument on their balance sheets based on the price the instrument could fetch in a current market transaction.

But U.S. regulators have grown concerned recently that some companies may have adopted the standard in a way that allows them to avoid recognizing losses in earnings.

At the FASB's User Advisory Council meeting in New York, the accounting rule-makers faced heated questioning from financial analysts who said the rule could be compromising financial statement comparability and transparency.

FASB member Leslie Seidman said that if companies have not properly adopted FAS 159 and its companion fair value measurement standard known as FAS 157, they could be changed.

"It's our hope that that's a transition issue related to that scheme," Seidman said. "I'm poised to amend them if we need to."

The board said that some brokers had advertised selling strategies designed to take advantage of the rule to financial companies, but those strategies were not what the board had intended.

"This was meant to be kind of an opportunity in a fairly principles-based way for people to do the right thing," FASB Chairman Bob Herz said.

At the time it adopted FAS 159, FASB said it intended the fair value option to improve transparency for investors by showing them the market value of companies' financial assets.

But some companies, under FAS 159, may have opted to mark an underperforming asset to market on its balance sheet, sell the security, then repurchase the same security but choose not to mark it to market in the future. Such a transaction would allow companies to avoid recognizing losses on the asset in income.

The U.S. Securities and Exchange Commission staff told auditors last month it frowned on such strategies, which were not in the spirit of the rule.

Since then some financial companies have increased their disclosure around the rule.

For example, First United Corp. (FUNC.O), the parent company of First United Bank & Trust, issued a separate press release on how it had used the standard to restructure its portfolio.

And, on Monday, commercial and consumer lender CIT Group Inc. (CIT.N) restated first-quarter earnings downward by 26 percent after it decided to put off adopting the rule.

Herz, who was recently appointed two a second term as FASB's head, said he was encouraged that some companies had changed their mind on using the standard.

FASB members said they would watch company disclosures surrounding the adoption of FAS 159 very carefully to see if a change to the standard is needed.

"This is another case of accounting standards and no good deed goes unpunished," said FASB member Mike Crooch.

(Reporting by Emily Chasan; Reuters Messaging: rm://emily.chasan.reuters.com@reuters.net;Tel: +1 646 223 6114, editing by Martin Golan; ) Keywords: FASB FAIRVALUE/

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