Mark-to-Market: Accountants Steal Spotlight From London
James Gattuso /
For days, President Obama and 19 other world leaders have been meeting in London — with an occasional side visit with the Queen — to discuss the world’s finances. But today, the real action was in the implausible city of Norwalk, Connecticut for a meeting of the Financial Accounting Standards Board – the private organization that sets accounting standards This gathering of accountants may have lacked the celebrity appeal of the London to-do, but may do more to ease the financial crisis than any communiqué out of Europe. At issue was the “mark-to-market” system of accounting – whereby certain assets are required to be entered on a firm’s accounting at current “fair market value,” rather than book value based on the original purchase price.
As a general principle, mark-to-market is good policy. But current market values are not always easy to measure. And in today’s climate, with many “toxic” securities not trading, and others being sold at fire sale rates, a too strict application of mark-to-market can dramatically reduce reported values, and force firms into (artificial) financial trouble. Recognizing this, FASB issued guidance late last year allowing firms greater ability to avoid such mark-downs when markets are distressed. Today’s decisions expand further the ability of firms to avoid misleading or inaccurate valuations.