SEC Makes Mark-to-Market Accounting Markedly Better

The Heritage Foundation ^ | October 2, 2008 | David C. John and James L. Gattuso

[kellynla]

Accounting rules rarely garner much public attention, and for good reason: The business of toting up numbers is both devilishly complex and profoundly uninteresting to most Americans.

This week, however, accounting was suddenly in the national spotlight as policymakers grappled with the ongoing financial crisis. At issue was a concept known as "mark-to-market." On Tuesday, the Securities and Exchange Commission (SEC), along with the Financial Accounting Standards Board (FASB)--the private regulatory body charged by the SEC with determining such arcane things--issued new guidance on how companies should apply mark-to-market rules to their balance sheets. It sounds like a small thing, especially when compared to a $700 billion rescue plan, but it is a significant step toward addressing the causes of the credit crisis.

[phothus]

Thank God. If Congress had a clue, they would have included some guidance on this in their “bailout” package. Given that it is causing 1/2 the turmoil, you think they would have bothered to try and fix it.

[motherof2]

Distressed or forced liquidation sales are not necessarily determinative in measuring value.

This is a quote from the heritage.org page.

Tell me this isn’t true. Actual realized losses (fire sales) don’t have to be written off as such. The company can write up whatever value they “want” for a given asset after the actual release of that item. Maybe that is a good thing ...can I apply this to my Capital Gains tax calculation?? :-)

[nicola_tesla]

This is just more of the same garbage that got us Level 2 and 3 “assets”.

If a firm can’t make their valuation process open to those who need to value their assets, then there is no transparency and the same distrust that is currently paralyzing the market will continue.

[WOSG]

“If Congress had a clue, they would have included some guidance on this in their “bailout” package. “

Actually they did. They didnt force SEC to change, but did give some directive to SEC to allow changes.

SEC took the hint.

[WOSG]

“Distressed or forced liquidation sales are not necessarily determinative in measuring value.

This is a quote from the heritage.org page.

Tell me this isn’t true.”

We cant deny it because it is true. You can pick up a property in foreclosure or tax sale for less than its real value. In a panic time (like now on wall st) you can get things for less than their long-run real value.

If you have a business, and a similar business goes out of business across town, would you like if the bank came by and called your loan in because “your business is worth zero” even if you have assets, good cash flow and are current on debt payments? It’s a recipe for disaster.

Marking an asset down to a forced-sale price is not reflective of an assets true value.

[starlifter]

It’s dry reading but the underlying concepts in the SEC release are important.

The important items are judgment and transparency - two things not in huge supply on the street during the past few years. Another critical element is the orderly market with willing buyers and willing sellers.

Regulators need to monitor the disclosures and the market needs to keep people honest. While a fire sale by one entity is not necessarily the true value for all, by the same token I cannot value my $100,000 house at $500,000.

[petercooper]

bttt

[phothus]

Thanks for the clarification.

[Bean Counter]

Please forgive me if I sound like a rube, but the finer points of Mark to Market elude me, and I think it’s vital to understand this concept before we agree to any changes that could potentially do more damage down the road via the Law of Unintended Consequenses.

Mark to Market sounds a lot like the way residential real estate is valued annually by the local County Assessor here in Washington. Every year I get a new assessment that is supposedly based upon the current sale value of my home regardless of whether it is available for sale or not.

By using a form of M2M, the tax value of my home increases or decreases with the ebb and flow of whatever the County says the market is, and by Law, the Assessor is who determines what the market value of a residence is.

The question though, what happens in times like these when there effectively is no market?? The longer the markets stay depressed, the more meaningless the assessed vales are under an M2M system.

Isn’t changing from Mark to Market to some other way of determining value, just as difficult to do as changing from an accrual system back to straight cash?? What are the downsides to this, and what should we be looking out for as a sign of impending trouble in the future??