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FASB Eases Fair Value Accounting Rules

Financial Services Task Force Alert James D. Friedman, John P. Vail, James J. Gatziolis

On Thursday, April 2, the U.S. Financial Accounting Standards Board ("FASB") approved a plan to revise its guidelines on fair value, or mark-to-market, accounting in order to give companies, particularly banks, more flexibility in valuing their distressed assets.

The new rules will take effect with second-quarter 2009 financial reporting for most companies (companies will be allowed to apply them for first-quarter 2009 financial reporting) and will give companies more judgment in deciding how to value assets when the market for those assets is not functioning. Some of the key points of these rule changes are as follows: 

  1. FASB stated that the objective of mark-to-market accounting is to establish a price that would be received by a company in an "orderly" transaction in the current inactive market. It stated that an "orderly" transaction for accounting purposes would not include a forced liquidation or a distressed sale of an asset.

  2. FASB agreed to drop the presumption in mark-to-market accounting that all transactions in an inactive market are distressed unless proven otherwise.
  3. FASB clarified when banks are required to take write-downs on impaired assets, letting companies record smaller losses on their income statements.

FASB has previously refused to change fair value rules, as many feel the rules are necessary in order to provide investors with the most accurate information possible. However, under much pressure from Capitol Hill lawmakers, FASB agreed to make the changes in the hope that they will help distressed banks by providing them with more leeway to report what they feel the true value of their assets to be in the current economic conditions.

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For more details or if you have any questions, please contact Jim Friedman at 414-277-5735 /, John Vail at 312-715-5042 /, Jim Gatziolis at 312-715-5049 /, Matthew Rutlin at 312-715-5085 /, or your Quarles & Brady attorney.