Courtesy of the Washington Post which amply demonstrates a solid lack of understanding about ‘value’ in accounting comes this pearl. The SEC and FASB are allegedly modifying the ‘mark to market‘ rules to allow distressed banks to take into account ‘other factors’ when reviewing their toxic assets. WashPo says this:
An odd-sounding accounting phrase at the heart of this is something called “mark-to-market” accounting. Many think that if this requirement were ended, the crises could be eased…
…The root problem now is that financial institutions have been caught holding value-less, or “toxic,” assets on their books, such as the mortgage-backed securities based on sub-prime mortgages that have defaulted.
The government believes that those assets will be worth something soon — that’s why they want to buy them in the $700 billion Wall Street rescue plan. But under mark-to-market rules currently required, they are worth almost nothing, threatening those who hold them with insolvency.
If the holders could place a value on the assets equal to the estimated value they should bring in the future, suddenly the balance sheets of these financial institutions would look a lot healthier.
What ‘other factors’ might that be? If there is no market for assets, they have no value. It doesn’t get much simpler than that. Does it? According to FASB, future anticipated cash flows can be taken into consideration with adjustments for appropriate risk factors. That seems fair enough except that the complexity of the assets the banks hold makes it extremely difficult to fathom the ‘pieces’ to which the issuers are entitled. Unravelling that alone is a migraine sized headache. It’s not something that auditors are qualified to assess.
The US government ISN’T buying the toxic assets because they think they have some worth. They’re buying them in an attempt to free up the ossified arteries of the US banking system. In its defence, WashPos says this sounds like ‘voodoo accounting.’ Darned right. I can see the sympathy vote piling up already. Not here.
Here is the link to the FASB press release (PDF) – which is about as transparent as milk.
Update: Reuters is reporting that 60 lawmakers are appealing for a suspension of the mark to market rule. More genius thinking.
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