NEW YORK (Reuters) - U.S. accounting rule makers met on Thursday to consider expanding mark-to-market accounting rules to loans and other securities, moving ahead with a plan already strongly opposed by banks.
Mark to-market, or fair value accounting, requires companies to put market values on their financial assets. It is currently used for traded securities, such as stock holdings or real estate, but is not required for bank loans and other types of financial instruments that make up large portions of the balance sheets of banks.
The U.S. Financial Accounting Standards Board (FASB) is in the early stages of discussing a proposal that could require nearly all financial instruments to be recorded at market value on corporate balance sheets and recognize changes to those values in earnings. The FASB is expected to release a formal proposal, or “exposure draft,” on the changes in the first half of 2010.
At its weekly meeting in Norwalk, Connecticut on Thursday, members of the Financial Accounting Standards Board discussed how companies might show differences between realized and unrealized gains on financial instruments; how management’s view of credit could be incorporated compared with the market’s view; and whether mark-to-market accounting could improve the accounting for purchased loans.
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.
“We are taking a very measured and comprehensive approach to this complex issue and have many discussions and roundtable meetings ahead before an exposure draft will even be created,” FASB spokesman Neal McGarity said on Thursday.
The London-based International Accounting Standards Board has also been working on a similar change, but is moving at a slightly faster pace and is expected to release its proposal later this year.
Banks are already concerned about the potential changes because loans, which are not currently marked to market, make up a large portion of their balance sheets. A change in accounting rules could force them to take losses, potentially affect their ability to meet capital requirements or cause additional volatility in earnings.
“What the accounting boards are discussing now would be the biggest accounting change we’ve ever seen,” Donna Fisher, the American Bankers Association’s senior vice president of tax, accounting and financial management said in a statement on Thursday.
The ABA said in the statement it was “deeply concerned” about the potential changes and that, while bankers have long supported mark-to-market accounting for assets that are “actively traded,” they oppose its use for the traditional loans banks make.
FASB board members said at the meeting they believe some of the changes being contemplated would give investors more of the information they are looking for from companies. The potential changes could reinvigorate a debate about the use of mark-to- market accounting, as the accounting boards have greatly expanded its use over the last several years.
Some investors and banks blamed new rules on fair value for accelerating the financial crisis and, in April, the FASB, under pressure from Congress and the financial industry, acted to give banks more flexibility in how the rules are applied.
Reporting by Emily Chasan; editing by Andre Grenon