Monday, April 20, 2009
Mark to Market Accounting
The controversy around mark to market accounting has been all over the news lately and everyone seems to have a different opinion. Some say that banks are being forced to write assets down to artificially low levels when they are really worth far more while others believe that mark to market accounting reflects the most accurate picture of the value of a company's assets. Throughout the media frenzy, the FASB has stood by mark to market accounting and the guidance of FAS 157, but were willing to draft additional guidance in the form of FAS 157 (e) which was released in early April. FAS 157 (e) gives additional guidance on what constitutes an illiquid market and a distressed sale transaction and provides company's with some flexibility and judgement in determining the valuation for assets that are determined to be in illiquid markets in which only distressed transactions are occurring. As a manager at PwC, I am constantly discussing FAS 157 and its impact with my clients and I would like to open this topic up to comments and discussion. I am very interested in hearing what students at PSU think about mark to market accounting and the impact that it has. Please post a comment by clicking the comments button at the bottom of this post, I look forward to hearing your ideas.
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Great topic Dave, as it has been quite the debate lately. You know you're in a financial crisis when a FASB ruling becomes front page news. The reinstatement of mark to market accounting has brought with it a frenzy and somewhat vehement controversy. Insofar that the controversy continues at its rapid pace, I think it will be hard for companies and investors to trust mark to market accounting when creating and valuing financial reports. Directing your first point, MTM accounting is having banks write off billions of dollars in assets, below intrinsic value in some cases, in this temporary and volatile market. When investors are fearful and are selling out of shear panic, the market may not be the best arbiter of value. This is where I think FAS 157(e) gives great guidance and of which I support. While I agree that financial reports should be conservative and portray a clear, conservative representation of a company's financial operations and contingent liabilities and assets, I feel the market's valuation is skewed in times like these. The bottom line is that the market needs trustworthy guidance to mollifying the fears of investors and get the market back on track. I'm curious to hear what other comments on this issue as well.
ReplyDeleteTrey Rabinek
PwC Pittsburgh
Advocates of mark to market argue that it supports transparency, and that the balance sheets of financial institutions are complicated enough, as is. While mark to market poses an issue in such hostile economies, who is to say that managements discretion is the best re-measurement tool for an undervalued toxic asset? The latest FASB pronouncement allows for the reversal of large write-downs on illiquid assets. In essence, FAS 157(e) can be viewed as component to building balance sheets back up. This ruling completely undermines the Treasury's toxic asset plan, as FAS 157(e) alleviates the need for banks to rid of the assets that are "dragging down" the books. Great topic, I am interested to read other's perspective on this issue as well.
ReplyDeleteJosh Cohen
Penn State
PwC Pittsburgh