"Mark to Market" Accounting: Amend It, Don't Suspend It

Criticized for worsening the financial crisis, "mark to market" accounting needs to be amended but not suspended, panelists said at an SEC roundtable discussion today.

"Breaking or tweaking the thermometer while the doctor is examining the patient isn't going to save him but we need to set out to help improve fair value reporting," said Patrick Finnegan of the Chartered Financial Analyst Institute.
Mark to market, also known as "fair value," accounting has been blamed for exacerbating recent financial woes. Late last year, the Financial Accounting Standards Board (FASB) introduced rule 157, which forces firms to value assets such as debts by how much they might fetch in the current market.

Critics claim that when the market is spiraling downward in a financial crisis, assets are unfairly valued much lower than they are really worth. That, in turn, tarnishes firms' balance sheets and leads to downgrades in their ratings, forcing their stock prices to tank further.

When Congress approved the $700 billion financial bailout, it ordered a study of market to market accounting by yearend. The FASB and the SEC, which can override it, have already altered some accounting rules so that market to market doesn't apply to distressed assets. They are studying market to market more deeply.

Speakers at the SEC discussion seemed to agree that suspending market to market would be folly and that the accounting system by itself didn't cause the current finanical crash.

But there are plenty of issues that need to be addressed. These include how mark to market can be applied when there are no active markets to benchmark against. Cindy Ma of Houlihan Lokey Howard & Zukin said that judgments must be made "against whether the market is active or inactive."

In some cases, mark to market doesn't provide useful information, said Bradley Hunkler of Western Southern Life. Richard Ramsden of Goldman Sachs said that studies should be made to "disaggregate how much of the problem is mark to market and how much is credit-related."

The issue will become further complicated when U.s. firms shift to the more principles-based International Financial Reporting Standard (IFRS) system used by most global companies. IFRS calls for more accounting decisions to be made according to general principles rather than the strict rules now promulgated by the U.S. Generally Accepted Accounting Principles (GAAP).
The SEC and GAAP are expected to make their recommendated changes by January.