By the end of 2009, the FASB will propose a new fair value assessment for loans. That’s right the FASB is looking to expand mark to market accounting. This will undoubtedly cause great concern for banks and will bring forth more earnings volatility for financial institutions. Looks like another repeat of 2007.

FAS 115 requires only debt and equity securities to be reported at fair value. The July proposal “Accounting for Financial Instruments” states: all financial instruments, including loans, will be presented on the balance sheet at fair value. Also, any changes in value will be recognized in net income or other comprehensive income, with an optional exception for “own debt,” which will be measured at amortized cost. What this mean is that any credit impairment (losses on loans) will be reported under net income.

Below is the July 15, 2009 FASB Board meeting details. The Board agreed to propose a model to improve financial reporting for financial instruments.

• The Board agreed to propose that all financial instruments will be presented on the balance sheet at fair value with changes in value recognized in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which will be measured at amortized cost. For those financial instruments whose change in value is recognized in other comprehensive income, amortized cost will be displayed on the balance sheet in addition to a fair value adjustment to arrive at fair value.
• The Board agreed to propose that changes in an instrument’s value may be recognized in other comprehensive income on the basis of qualifying criteria related to an entity’s management intent/business model and the cash flow variability of the instrument. The Board will provide additional guidance on how to apply those qualifying criteria. The Board agreed to propose that changes in value for derivatives, equity securities, and hybrid instruments containing embedded derivatives requiring bifurcation under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, will be recognized in net income. The Board agreed to propose that for all financial instruments, interest and dividends will continue to be recognized in net income. Credit impairments, as well as realized gains and losses from sale and settlement, also will be recognized in net income. The classification of instruments will be determined at initial recognition of the instrument and will not be subsequently changed.
• The Board agreed to propose to require one statement of financial performance with subtotals for net income and other comprehensive income. It also agreed to propose to continue to only require earnings per share for net income.

The earliest this could be implemented is early 2011 and I am certain that banks will strongly lobby against any new mark to market rules that could repeat the events of late 2007.

thevoice@voicedup.com
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Tags: Banks, Bear on wall street, Financials, Mark to market

This entry was posted on Monday, September 21st, 2009 at 12:50 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed.