Possible Change in Accounting Rules

LSUMASTERMIND · Oct 1, 2008

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/30/AR2008093002298.html?hpid=topnews

Under intense political pressure, regulators for securities and accounting standards this afternoon issued what they called a "clarification" to provisions that have come under fire from bank executives and some lawmakers for contributing to the credit crisis.
Regulators said that the new guidance will help companies figure out the value of complex mortgage-related investments at a time when there are few trading partners willing to purchase them.
Under an accounting standard that took effect last November, businesses are required to employ "fair value" accounting, in which they put a price tag on their assets even if they do not intend to sell them right away.
The standard, also known as "mark to market," has led portfolios to plunge in recent months as banks affixed fire sale prices to their assets, a move that sometimes required them to raise still more capital to meet regulatory requirements. The measure also led to clashes between corporate executives and independent auditors over how low the markdowns should be forced to dip.
In a meeting last week, lobbyists for the American Bankers Association and the Financial Services Roundtable urged the Securities and Exchange Commission to suspend or relax the accounting provision. A similar advocacy effort continues on Capitol Hill, where lawmakers are reconsidering efforts to aid the financial industry after the House yesterday failed to pass a recovery plan. That bill also would have forced a re-evaluation of the "mark to market" accounting rules.
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This is playing with financial fire here. If they change the rules that are in place now. Companies will inflate the value of declining assets on their books. Which could lead to another Enron scenerio. If they do this, it will come back to bite them on the azz.

LSUsupaFan · Oct 1, 2008

LSUMASTERMIND said: ↑

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/30/AR2008093002298.html?hpid=topnews

This is playing with financial fire here. If they change the rules that are in place now. Companies will inflate the value of declining assets on their books. Which could lead to another Enron scenerio. If they do this, it will come back to bite them on the azz.
Click to expand...

It isn't exactly the same thing. While I am generally a fan of mark to market it only works when there is a market to mark to. Just because banks can't unload these bonds doesn't mean they are worthless. These bonds are backed by assets that have value far greater than what is being reported on the balance sheet. My fear as an investor would be that FAS 157 is forcing holders of these bonds to understate their value.

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Possible Change in Accounting Rules

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