At least one critic of the proposed changes in mark-to-market and fair value accounting rules is changing his tune and seeing some positive signs in the final version.

The Financial Accounting Standards Board published the “final” version of its standards for revising fair value and mark-to-market standards to give financial institutions more flexibility to value illiquid assets such as mortgage-backed securities (see FASB Issues Final Answer on Fair Value). FASB initially opposed making major changes in the standards, but relented after FASB Chairman Bob Herz came under pressure during a congressional hearing last month (see Congress Presses FASB on Mark-to-Market).

While the relaxed standards still seem like a capitulation to some observers, one former opponent of the proposed changes, Espen Robak, president of Pluris Valuation Advisors, sees a silver lining.

“This is great news, not only for investors, but for reporting entities as well,” he said. “As a result of the revisions, public companies will have improved guidance on how to apply the rules and investors will get financial information of a higher quality – and more frequent information, too.”

While many details remain to be worked out, he noted, the final revisions reaffirm that the measurement goal of fair value is the “exit price,” which is the price that would be paid based on market conditions on the day the asset is being valued, Robak said.

This “mark-to-market” approach prohibits companies from “taking the longer view” and valuing assets based on their own, more optimistic, views of what market conditions might be like in the future. The new FASB Staff Position also states explicitly that “a reporting entity’s intention to hold the asset or liability is not relevant in estimating fair value,” an important clarification for many companies.

A new, improved example of how FAS 157 should be implemented also indicates that the FASB clearly favors using transaction data, even when transactions are sporadic and irregular, but with adjustments and analysis based on current market conditions.

“You can’t just blindly take the last trading price and apply it,” Robak said.

The proposed FSP could have been especially problematic for hedge funds and mutual funds, creating a potential disconnect between the net asset value of the funds and the true exit value of their portfolios, which could in turn have led to a surge in redemptions. By reinforcing “fair value” and providing additional guidance, FASB eliminated that problem, according to Robak.

In addition, the revisions:

• Eliminate the presumption that all transactions in an inactive market are distressed sales.  Instead, financial information and other factors will be used to determine whether a particular deal was distressed. Pluris filed a comment letter with the FASB describing its research showing that inactive market trades are not always forced or distressed.
• Require disclosure of changes in valuation techniques and related inputs resulting from the revised regulations and quantification of the impact, if practicable.
• Require more fair value measurements broken down by a greater number of categories. This additional “granularity” in financial disclosures will help investors trying to gauge the health of a company’s balance sheet.

In addition, the revised regulations will not be applied retroactively, and companies will not be required to comply with them until the reporting period ending after June 15, 2009.