After a few months of carnage on Wall-Street caused in part by corporations showing paper losses on assets they have no intention of selling, it looks like FASB may be considering a bit of “paper relief” according to an article in today’s Wall Street Journal (subscriber link):
The Financial Accounting Standards Board last week began steps to loosen a rule regarding when financial firms must book losses on a narrowly defined subset of lower-rated mortgage-backed securities, commercial-backed securities and certain other structured securities.[…]
Mark-to-market issues have taken center stage lately as life insurers designate swelling numbers of securities as "temporary impairments." They quarantine these "unrealized" losses in a special bucket within shareholder’s equity called "other comprehensive income." Gains and losses in that bucket often aren’t included in how regulators in the financial sector measure capital.
Eventually, though, if the losses don’t reverse, a firm has to recognize them as "other than temporary." In that case, the loss runs through net income, a move that grabs investor attention and can affect measures of regulatory capital.
The numbers have gotten so huge — $27 billion at giant insurer MetLife Inc. in late November — that many investors are worried insurers are failing to recognize reality. And a battle could erupt at year end as auditors potentially demand write-downs of at least some of the securities.
It’s better than nothing. The real challenge is in determining an appropriate way to value assets which are held in longer-term support of an entity’s operations, and wouldn’t normally be sold…as well as valuing assets which have limited liquidity, or for which the market has temporarily ceased to exist…and to conduct that valuation in such a way as to be independently verifiable.
And, of course, the challenge is compounded by the reality that such valuations should really be viewed as a range of reasonable estimates, rather than the single point estimate accountants and finance guys so emphatically desire.
There isn’t an easy answer to the question of valuation…which is one of the reasons that any limited progress by FASB should be welcome.
