FASB set to vote April 2 to help banks improve illiquid asset valuations

WASHINGTON (MarketWatch) — As bankers prepare to release their first-quarter results, they are looking to accounting regulators and their auditors to make changes that would beef up the value of their illiquid assets and in doing so, improve their profits and revenues.

The Financial Accounting Standards Board is scheduled to vote April 2 on giving auditors more flexibility in valuing illiquid mortgage assets that may have a long-term value and strong cash flow — in other words, they are not distressed assets, but they can’t be sold in the markets today.

The new guidance would alter so called mark-to-market rules, which require banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset.

FASB has already provided auditors with flexibility in how they can value illiquid assets; however, accounting firms have been averse to employ such authority for fear of liability. The FASB guidance would allow bank auditors to use “significant judgment” when valuing the illiquid assets for which they don’t believe they will be able to collect all the amounts due.

Columbia Business School Accounting Professor Robert Willens said new audit guidance, which would give banks the ability to use internal models and analysis to value their illiquid assets, could hike their earnings on average by 20%. However, he added that large banks such as Citigroup Inc.would get “the lions share” of the revaluation profits because they are stuck with a disproportionately large amount of the illiquid mortgage and other securities.

The American Bankers Association met Tuesday to discuss their lobbying strategy on banking legislation, which includes pressing lawmakers to urge FASB and its parent regulator, the SEC, to alter mark-to-market rules.

ABA vice president Donna Fisher told bankers that if they want to press lawmakers and FASB on the rules, they need to do it immediately. She pointed out that bankers seeking to comment on the FASB proposal must do so by Wednesday, April 1, in preparation for the vote on Thursday.

Fisher added that the agency may delay its approval of new guidance, but that it still would be ready in time for banks to make changes prior to releasing their first-quarter results. Most banks report their first-quarter results by mid-April, so new FASB guidance rules are expected to apply retroactively for January, February and March, 2009, Willens said.

Recouping mark-to-market losses retroactively

In addition to altering accounting guidance, bankers are pressing lawmakers to set up a procedure to retroactively recoup losses they have already taken on assets with good cash flow they are holding to maturity.

Bankers at the conference argued that they have already marked down the value of most of their held-to-maturity assets to fire-sale prices and have taken unnecessary losses. They contend that they should be able to use the upcoming FASB guidance, should it be approved Thursday, to remove already existing losses.

House Financial Services Committee Chairman Barney Frank, D-Mass., told the ABA that he will take their concerns about reversing retroactive losses to the SEC and Congress. “They [bankers] ought to be able to go back and say they took that loss on an asset that is being held to maturity and recoup that loss,” Frank said.

However, Willens said it would be extremely unusual for FASB to allow banks to go back and restate their existing earnings. “FASB doesn’t traditionally do that, but Frank’s pressure could make it happen,” he said.

The bankers also discussed plans to talk with lawmakers on Capitol Hill about their support for legislation introduced by Reps. Ed Perlmutter, D-Colo., and Frank Lucas, R-Ok., which would create a Federal Accounting Oversight Board made up of officials from FASB, the Federal Deposit Insurance Corp., Federal Reserve, Treasury Department and the Public Company Accounting Oversight Board. ABA vice president Donna Fisher said that within this context regulators would see the bigger picture when it came to the impact of mark-to-market accounting rules on the markets.

One key critic of mark-to-market accounting rules, former FDIC Chairman William Isaac, said he believed FASB is a “tool of the accounting industry.” Isaac, who was an early key opponent to mark-to-market, added that auditors are resistant to change mark-to-market accounting rules because it would require them to accept further liability and spend more time evaluating the value of bank assets.

“They [auditors] don’t have to worry about liability because they can just look at a computer screen and say, that is the value,” he said.

However, Espen Robak, president of Pluris Valuation Advisors in New York, said changes to mark-to-market rules would allow banks and other corporations to fudge their numbers and that would lead investors to worry more about the valuations, not less. Robak said he believes investors will be much more conservative in how they value bank or other company balance sheets if the rules are changed.

“Investors will think, ‘This what they claim their assets are worth, I do not know how they came up with this value and FASB just changed the valuation rules to let banks come up with whatever value they want,” Robak said.