At least one critic of the proposed changes inmark-to-market and fair value accounting rules is changing his tune and seeingsome positive signs in the final version.

The Financial Accounting Standards Board published the"final" version of its standards for revising fair value andmark-to-market standards to give financial institutions more flexibility tovalue illiquid assets such as mortgage-backed securities. FASB initially opposed making major changes in thestandards, but relented after FASB Chairman Bob Herz came under pressure duringa congressional hearing last month (see Congress Presses FASB onMark-to-Market).

While the relaxed standards still seem like acapitulation to some observers, one former opponent of the proposed changes,Espen Robak, president of Pluris Valuation Advisors, sees a silver lining.

"This is great news, not only for investors, but forreporting entities as well," he said. "As a result of the revisions,public companies will have improved guidance on how to apply the rules andinvestors will get financial information of a higher quality - and morefrequent information, too."

While many details remain to be worked out, he noted, thefinal revisions reaffirm that the measurement goal of fair value is the"exit price," which is the price that would be paid based on marketconditions on the day the asset is being valued, Robak said.

This "mark-to-market" approach prohibitscompanies from "taking the longer view" and valuing assets based ontheir own, more optimistic, views of what market conditions might be like inthe future. The new FASB Staff Position also states explicitly that "areporting entity's intention to hold the asset or liability is not relevant inestimating fair value," an important clarification for many companies.

A new, improved example of how FAS 157 should beimplemented also indicates that the FASB clearly favors using transaction data,even when transactions are sporadic and irregular, but with adjustments andanalysis based on current market conditions.

"You can't just blindly take the last trading priceand apply it," Robak said.

The proposed FSP could have been especially problematicfor hedge funds and mutual funds, creating a potential disconnect between thenet asset value of the funds and the true exit value of their portfolios, whichcould in turn have led to a surge in redemptions.By reinforcing "fair value" and providingadditional guidance, FASB eliminated that problem, according to Robak.

In addition, the revisions:

•Eliminate thepresumption that all transactions in an inactive market are distressedsales.Instead, financialinformation and other factors will be used to determine whether a particulardeal was distressed. Pluris filed a comment letter with the FASB describing itsresearch showing that inactive market trades are not always forced ordistressed.

•Require disclosureof changes in valuation techniques and related inputs resulting from therevised regulations and quantification of the impact, if practicable.

•Require more fairvalue measurements broken down by a greater number of categories. Thisadditional "granularity" in financial disclosures will help investorstrying to gauge the health of a company's balance sheet.

In addition, the revised regulations will not be appliedretroactively, and companies will not be required to comply with them until thereporting period ending after June 15, 2009.

 

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