Corporate Governance

FASB Approves Fair Value Accounting Standards

By Tamar Weinrib

The Financial Accounting Standards Board ("FASB") approved three new fair value accounting standards that give financial institutions discretion in valuing asset-backed securities.  The first rule makes it easier for banks to ignore valuations on a security if they deem the market illiquid or otherwise impaired.  The second rule calls for interim reporting of asset valuation.  The rule provides for significantly more disclosure around credit losses and for quarterly disclosure of the value of these securities.  The last rule, which was the subject of heated debate prior to its approval and is limited to debt securities, deals with the valuation of impaired securities, allowing banks and other investment companies to report the actual credit losses of a security it intends to hold to maturity rather than the market losses of that security on their earnings reports. Fair value accounting requires that companies value their assets based on current selling prices.   

While this may help banks appear stronger, these changes are not good for investors.  As expressed by the Council for Institutional Investors on April 3, 2009, "the Proposal, without significant revisions, will likely result in investors receiving less useful information about the fair values of financial assets." While the Council agrees with the implementation of fair value accounting in general, it requested that the FASB revise its proposal to eliminate the presumption that quoted market prices must not be used under certain circumstances and that it require additional disclosures. Click here to view the Council of Institutional Investors letter to the FASB.

Full post as published by PomTalk on April 06, 2009 (boomark / email).