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Government to clarify accounting rules for banks
AP Business Writer (AP:WASHINGTON) Federal regulators on Tuesday clarified accounting rules for banks in a way immediately embraced by the industry, which has been seeking relief that could boost its balance sheets in the financial crisis.46 minutes ago
By MARCY GORDON
The Securities and Exchange Commission and the Financial Accounting Standards Board issued clarifications to the current rules, and said more detailed guidance is coming later this week from the standard-setting FASB.
The banking industry, which has seen its mortgage-backed assets plummet in value, has been pressing the SEC to suspend the so-called "mark-to-market" accounting rules that require banks to value their holdings at current market prices, even if they plan to hold the assets for years. A possible addition to the $700 billion bailout bill being considered by Congress would reaffirm the authority of the SEC to suspend them.
But the head of a policy group backed by the biggest accounting firms warned lawmakers against such a suspension, saying it would hurt the interests of investors and the capital markets.
The principles of mark-to-market accounting "are rooted in the fundamental virtue of transparency and are central to informed market decisions and efficient allocation of capital," Cynthia Fornelli, executive director of the Center for Audit Quality, wrote in a letter to members of Congress.
The clarification issued Tuesday says that when an active market for a security doesn't exist, "the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."
The guidance will apply to companies' financial statements for the just-completed third quarter. It is "intended to provide increased clarity related to the practices that may be used to determine an appropriate fair value in the light of current market conditions," said James Kroeker, the SEC's deputy chief accountant.
The arcane accounting rules even intruded into the battle for the White House, with Republican presidential contender John McCain's campaign lauding the SEC's release. Democrat Barack Obama's campaign did not immediately return requests for comment Tuesday evening.
The American Bankers Association also applauded the action, saying the new guidance "will help auditors more accurately price assets that are difficult to value under current market conditions."
McCain's campaign said he "is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists. There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets."