The American Bankers Association is objecting to the newest proposed accounting standards for financial instruments, claiming that they would dramatically expand the use of the much-maligned mark-to-market accounting.

In a letter addressed to Financial Accounting Standards Board Chairman Robert Herz and International Accounting Standards Board Chairman Sir David Tweedie, ABA director of tax and accounting Donna Fisher wrote that her organization is “deeply concerned” about the direction of FASB and the IASB’s joint project on the recognition and measurement of financial instruments.

“During the current economic crisis, preparers of financial statements, external auditors, regulators and others have agreed that ‘mark to market’ accounting estimates have lacked a sufficient level of reliability,” she wrote. “With this experience, it is surprising that the IASB and FASB would both establish new accounting models that expand the use and prominence of MTM, rather than either reduce it or at least maintain the current level.”

She contended that FASB’s model dramatically expands the use of mark-to-market for financial institutions by requiring that virtually all financial instruments be marked to market on the balance sheet and that the income statement provide, under the “guise” of Other Comprehensive Income, the full amount of MTM.

“This focus on MTM does not improve transparency for investors or other users in a banking institution’s financial statements because it is irrelevant to how the vast majority of banking institutions will receive the cash flows for the assets,” wrote Fisher. “If banking institutions are to be measured based on MTM, it could result in dramatic changes not only in the types of financial instruments used to manage traditional banks, but also in the products provided by banking institutions.”

She added that the IASB’s model appeared to be more traditional but would also require many more assets to be recorded at mark to market.

“While there is a degree of recognition in FASB’s tentative decisions as to the importance of an institution’s business model, both boards’ tentative decisions emphasize MTM to an extreme, which would imply to users that the business model of financial institutions is based on fair value,” said Fisher. “Because the entity’s results will be measured based on fair values, banking institutions will be expected to perform based on MTM.”

She also outlined the principles the accounting standard-setters should follow in any new accounting model for loans and debt securities. Among the recommendations were that segments of an entity that originate and buy loans and securities to sell or securitize, as well as trade for profit, should use mark-to-market through earnings, but segments that utilize a traditional banking business strategy should use amortized cost to account for loans and securities. Any changes in the fair values of assets should be disclosed in the footnotes. The ABA also recommended that accounting rules should be consistently applied to the business model during business combinations, as well as when assets are credit-impaired at the time of acquisition.

Fisher concluded by asking FASB and the IASB to consider a number of questions, including, “What is the logic of accounting for financial instruments at market value, but not using MTM as the model for all industries?”

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