NORWALK, Conn. -- The standard-setting board for corporate accounting adopted guidance on Friday that will give banks a break in the distressed market and could boost their balance sheets.
The five-member Financial Accounting Standards Board decided to provide some flexibility in applying "fair value" accounting where there is no market for a security — like the market for banks' mortgage-backed assets that has been dysfunctional for months.
The board expects the guidance to take effect Saturday.
"We're giving people a wider range of options and input to get to fair value," said FASB spokesman Neal McGarity.
Fair value accounting, also known as "mark-to-market" accounting, requires banks to value their mortgage-related assets at current market prices. Devastated by the write-downs they have taken on mortgage assets since the collapse of the housing market, banks — with the backing of congressional Republicans — have been pushing hard for the Securities and Exchange Commission to suspend the requirement.
The $700 billion financial rescue bill enacted last week affirms the SEC's authority to suspend the mark-to-market requirement and directs the agency to conduct a study of the rule's effect on U.S. bank failures this year.
The FASB board, at a public meeting at its headquarters in Norwalk, adopted the proposal as guidance for the rule.
Under the change, when an active market for a security doesn't exist, companies will be allowed to use their managers' estimates of value, taking into account expected future cash flows and risk discount rates.
"Often when there is a dearth of relevant observable data, more analysis and some judgment needs to come into play in those situations," FASB Chairman Robert Herz said.
The FASB and the SEC jointly issued the clarification on Sept. 30, a move that was applauded by the banking industry, presidential contender Sen. John McCain and Republican leaders in Congress.
But critics, including some analysts and investor advocates, say that suspending the fair value rule will muddy the validity of financial statements and encourage exactly the kind of dodgy accounting that defined the Enron era of corporate scandals earlier in the decade.