U.S. accounting standard-setters bowed to congressional pressure on Thursday and allowed banks more flexibility to value toxic assets that have forced billions of dollars in writedowns.
The five-member Financial Accounting Standards Board voted unanimously for the new guidance on valuing assets, but split 3-2 in backing new guidance on how to write-down impaired assets.
The changes to mark-to-market accounting would take effect in the second quarter for most U.S. financial firms, but early adoption could be allowed for first quarter results.
Some lawmakers, banks and other supporters of the changes argue that pricing assets to firesale prices during a time of inactive markets has exacerbated the financial crisis through the writedowns, big earnings hits, damage to capital ratios, and a reduced ability to lend.
Investors take a different view, saying that more flexibility with the rules would let big banks hide the real value of their toxic assets.
The accounting board met in Norwalk, Connecticut to discuss more than 300 letters and e-mails sent by banks, investors and others commenting on the FASB proposals.
FASB Chairman Robert Herz said the accounting group did extensive outreach to investors, particularly major investors in financial institutions ahead of the Thursday meeting.
But some members of FASB expressed reservations about the changes proposed. I don't have a lot of confidence in how people value fair value, said FASB board member Thomas Linsmeier.
A Congressional panel last month told Herz to move quickly to ease the mark-to-market guidance or lawmakers would take action. Four days later FASB issued two proposals: one to give banks more flexibility in applying mark-to-market accounting and another addressing when banks must take writedowns on impaired assets.
In considering the proposals on Thursday, the FASB board said the objective of mark-to-market, or fair value accounting, in inactive markets should be to determine what an asset could fetch in an orderly transaction between market participants. Such an orderly transaction would not include distressed transactions or fire-sales, it said.
The board dropped a presumption in its original proposal that would have allowed all asset transactions in an inactive market to be considered distressed unless proven otherwise. It said that particular language could have had unintended consequences.
(Additional reporting by Emily Chasan and Rachelle Younglai in Washington; editing by John Wallace and Tim Dobbyn)