Phew!

The EU Finance Ministers met on Tuesday and it was widely rumoured that they were considering a “carve in” to change IFRS to reflect recent changes made to US GAAP by the FASB – in particular to suspend “mark-to-market” on certain types of financial assets and to permit the valuation of such assets on a “mark-to-model” basis.  This, it is suggested, would create a “level playing field” – it being regarded as “unfair” that US banks can value assets on a more generous basis (mark-to-model being permitted in order to produce higher valuations) than those banks that use IFRS.

Ironically, if the EU had introduced a “carve in”, or if the IASB had succumbed to political pressure and changed the accounting standard without due process, it would have been cited by the US as evidence of the lack of robustness of IFRS.  Yet the pressure to change IFRS comes from changes made to US GAAP by FASB under political pressure.

In this context there was a very interesting article in the Wall Street Journal (WSJ) on 3 June entitled “Congress Helped Banks Defang Key Rule”.  According to this article, “Thirty-one financial firms and trade groups...spent $27.6 million in the first quarter lobbying Washington...” primarily to get rules on mark-to-market changed.  The article explains in some detail how this lobbying worked but leaves the reader in no doubt that FASB changed the rules because of political pressure and, as the article states “... many investor groups opposed the changes... many saw the new rules as a watering down of standards...”

I appreciate that mark-to-market is not universally liked but it is the best that we have and it benefits from transparency thereby enabling users of accounts to make adjustments to accounts to reflect their own views on valuations.

According to today’s Financial Times Lloyd Blankfein, Chief Executive of Goldman Sachs, has made another speech supporting the use of fair value/mark-to-market.  The article opens: “More use of marking assets to market prices would have provided an “early warning” of the financial crisis, according to Lloyd Blankfein...”

Having a single set of global accounting standards is vital – but they must be high quality standards.  It is arguably better to have an “uneven playing field” than a “level playing field” based on poor standards.

 Mark to Market  1 Comments June 11th, 2009