Accounting rule makers are considering expanding the use of mark-to-market accounting, a move that is likely to be strongly opposed by banks because it could make their earnings more volatile and potentially force them to take big losses.
Many financial assets already must be marked to market, meaning their value is pegged to the ups and downs of the market. The new proposal being weighed by the Financial Accounting Standards Board (FASB) would apply mark-to-market rules to all financial instruments, including loans, which make up a big chunk of banks' balance sheets and typically don't have to be marked to market.
FASB won't be submitting a formal proposal until early 2010.
FASB contends that the move would be intended to make a company's true financial condition clearer to investors and other users of financial statements. If enacted, the move could cause banks' asset levels, and thus their book values, to fluctuate as assets that are now marked to market gain or lose value. In some cases, those gains or losses would count as part of net income; in other cases, they would go into "other comprehensive income," a catch-all for various types of gains and losses that don't immediately filter into earnings.
FASB softened the application of its mark-to-market rules in early 2009 after complaints from banks and members of Congress - a move that has boosted some banks' earnings and led mark-to-market supporters to allege that the board had caved to political pressure.
Banks contend that the mark-to-market rules unfairly punished them by forcing them to take big write-downs when their investments lost value in the market even though the market downturn was only temporary.
After successfully pushing to get mark-to-market rules eased in early 2009, look for banks to aggressively oppose any potential expansion of these rules.
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