FASB Relaxes Inactive Market Rules on Mark-to-Market Valuation

April 2, 2009 (PLANSPONSOR.com) - Under heavy Congressional pressure, the nation's accounting-standards board on Thursday approved new relaxed guidelines for the controversial mark-to-market asset valuation rules even though officials insisted they were still acting independently.

An Associated Press news report said a key change to theFinancial Accounting Standards Board (FASB) rule requiring companies to value assets based on current market conditions is likely to impact Obama Administration efforts to rid U.S. bank balance sheets of their “toxic assets.”

In the short run, banks would benefit by raising the value of the assets. But some critics claimed the higher values could also drive away prospective private investors who are part of the government bailout effort.

The Norwalk, Connecticut-based agencyreceived more than 300 letters and e-mails sent by banks, investors and others commenting on the mark-to-market issue.

According to the news service, the relaxed regulationsallow the assets to be valued at what the banks project they might sell for in the future, rather than a potentially low price reflective of the slumping economy. T

The changes apply to the second quarter that began this month, but FASB also allowed the rule to be used in relation to the first quarter of 2009 as well.

Investor advocates and other critics assailed the FASB, charging the organization had buckled to the insistence by Congressional lawmakers to change the mark-to-market system. The critics claimed the lawmakers were acting on behalf of bank industry lobbyists,

The AP reported that FASB was on the defensive after the vote. "These are extraordinary times and the FASB has responded swiftly to the critical needs of the capital markets," Neal McGarity, a FASB spokesman, told reporters, according to the news account. McGarity insisted the board already intended to make the changes before the congressional calls for action.

As part of the changes, FASB board said the objective of mark-to-market, or fair value, accounting in inactive markets should be to determine what an asset could fetch in an "orderly" transaction between market participants. Such an "orderly" transaction would not include distressed transactions or fire-sales, it said.

The board also agreed to drop a presumption in its original proposal that would have allowed all asset transactions in an inactive market to be considered "distressed" unless proven otherwise. It said that particular language could have had unintended consequences.

Detailed information about the FASB action on Thursday is available  here .