August 31, 2009 / 2:19 PM / 10 years ago

UPDATE 2-FASB eyes more disclosure on illiquid assets

* FASB aims for more transparency for investors

* Proposal follows easing of valuation rules for banks (Recasts; adds ex-FASB chairman’s comments, previous FASB votes, congressional oversight panel assessment, byline)

By Jonathan Stempel

NEW YORK, Aug 31 (Reuters) - U.S. accounting rulemakers have proposed requiring new disclosures on how companies value illiquid assets, a move designed to make it easier for investors to assess businesses’ financial health.

The proposal by the Financial Accounting Standards Board comes after a divided board on April 2 bowed to political and financial industry pressure and gave banks more discretion in valuing toxic mortgages and other illiquid assets.

Rules now being considered would force companies to provide a range of potential values for their hardest-to-value assets, including under “reasonably possible” market scenarios. They would also have to explain their thinking when they reclassify large amounts of assets as having become more or less liquid.

FASB Chairman Robert Herz in a statement said the changes would result in “increased transparency” for investors.

If adopted, the new rules would take effect in stages, and be fully implemented after March 15, 2010. FASB is seeking comment on the proposed changes through Oct. 12.

“Providing more information about something that is truly an estimate would give investors a better understanding, and perhaps a warning that the numbers could vary,” said Dennis Beresford, an accounting professor at the University of Georgia in Athens and a former FASB chairman.

Yet he added that requiring greater disclosure could increase companies’ costs to comply with Sarbanes-Oxley Act. The most recent quarterly reports for American International Group Inc (AIG.N), Bank of America Corp (BAC.N) and Citigroup Inc (C.N), for example, averaged 202 pages of small type.

“At some point, it becomes overwhelming for companies to prepare their reports,” Beresford said.

BANKS RESIST TOO MUCH DISCLOSURE

U.S. fair value accounting rules divide assets into three categories: Level 1, which can be determined from market prices; Level 2, often based on prices for similar assets in liquid markets; and Level 3, which are often illiquid and valued based on complex mathematical models.

FASB’s proposed rules would require companies to show how their valuation of Level 3 assets would increase or decrease in the event of a “reasonably possible” market scenario.

The changes would also require companies to disclose the amounts of and reasons for any “significant” transfers of assets into or out of Level 1 and Level 2.

The 19 lenders to undergo federal “stress tests” of their health had $657.5 billion of Level 3 assets on March 31, the Congressional Oversight Panel overseeing the U.S. bank bailout program said. Bank of America, Citigroup and JPMorgan Chase & Co (JPM.N) accounted for $395.3 billion, it said.

Critics of FASB’s vote in April had argued that giving banks more discretion in valuing assets could let them hide how fast their balance sheets were deteriorating.

Supporters said easing the rules could reduce banks’ having to value assets at fire-sale prices. They said such valuations exacerbated the global credit crisis by leading to more writedowns, lower capital ratios and reduced lending capacity.

On Aug. 13, FASB met to discuss whether to force companies to value nearly all financial instruments on their balance sheets, including loans, at market value, and to reflect them in earnings. Banks oppose such a change. FASB is expected to release a proposal in the first half of 2010. [ID:nN13241453] (Reporting by Jonathan Stempel; editing by John Wallace)

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