FASB Gives Banks Ticket to Doctor Their Books (Pt .1)

Long-term fix or short-term trickery?

Banks saddled with toxic assets have cried to the government for relief. They’ve received a cash advance of taxpayer money, and now they’ve been given yet another gift.

Ronald Orol reports for MarketWatch that the Financial Accounting Standards Board (FASB) voted unanimously to “give auditors more flexibility in valuing toxic mortgage assets that may have long-term value.” This is expected to boost bank operating profits for Q1 2009. It also alters mark-to-market rules, where banks and corporations assign a value to assets like mortgages, securities, credit-card debt and student-loan investments. The values assigned are based on the current market price for that asset.

Banks are chomping at the bit for this

The FASB’s decision comes none too soon in the mind of bankers, who have complained that they have assets that can’t be sold because there is no active market for them. Banks and their auditors will now be allowed to use “significant judgment” when valuing toxic asset. What does this mean? If companies have assets with strong cash flows that can be estimated, then those cash flows would be the basis for estimating appropriate value in the corresponding toxic (illiquid) market.

FASB Chairman Robert Herz has said that “auditors will need to make a greater effort to judge whether something is distressed or not. The majority supported what we were doing. There no longer will be the presumption that these assets are being sold in a distressed sale.”

CLICK HERE to see what else the banks are asking for…

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