By Ian Katz
Oct. 10 (Bloomberg) -- The Financial Accounting Standards Board clarified a rule blamed for exacerbating the credit crisis without giving bankers flexibility they sought in determining the so-called fair value of assets such as subprime mortgages.
FASB, the U.S. accounting rulemaker, agreed to give companies guidance on valuing assets in inactive markets, without changing the rule. The guidance will probably be released tomorrow, FASB spokesman Neal McGarity said after the board met at its Norwalk, Connecticut, headquarters.
A clarification is needed because when the rule telling companies how to determine a fair-value for assets was written, ``we probably didn't contemplate exactly the current situation that has enveloped the credit and financial markets,'' FASB Chairman Robert Herz said. The standard took effect in 2007.
The fair-value rule, which requires companies to review holdings each quarter and report losses when the values decline, was a point of debate when Congress approved a $700 billion bank rescue package last week. The legislation reiterated the Securities and Exchange Commission's authority to suspend the rule and ordered the agency to study the role fair value plays in bank failures and corporate finances.
The American Bankers Association was disappointed that the board failed to clarify how to assess ``other than temporary'' losses, Donna Fisher, senior vice president for tax and accounting, said in an interview. The issue is contentious because ``you have assets that have no credit-quality problems that audit firms are expecting you to permanently write down.''
ABA Position
ABA member banks say the board's guidance ``has not tempered some audit firms' extreme positions'' on how to measure fair value, Fisher told the FASB in a letter yesterday.
Citigroup Inc. opposed a staff recommendation to use broker quotes in assessing fair value ``if companies are unable to obtain an adequate understanding of how the broker generated their quote,'' Robert Traficanti, deputy controller, wrote in a letter yesterday. Staff had said broker quotes ``may be an input when measuring fair value, without being necessarily determinative.''
UBS AG, the world's biggest money manager for the rich, said the guidance ``is consistent with the principles and spirit'' of the rule and will not change ``how those principles are being applied in practice.'' The UBS letter, dated yesterday, was written by John Gallagher, the bank's managing director of accounting policy and support.
``More needs to be done to immediately address the crisis at hand,'' the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness wrote in a comment letter yesterday The center ``requests that FASB freeze and review all currently pending proposed expanded fair value standards,'' center Chairman Richard Murray wrote.
To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net.
Last Updated: October 10, 2008 16:55 EDT
