U.S. accounting rulemakers bowed to congressional and financial industry pressure on Thursday by allowing more flexibility in valuing toxic assets, a move expected to boost bank earnings and improve their capital levels.

The five-member Financial Accounting Standards Board voted unanimously to let banks exercise more judgment in using mark-to-market accounting that has forced billions of dollars in writedowns and been blamed for worsening the recession.

But the board split 3-2 on backing guidance that would let lenders take smaller losses on impaired assets available for sale, a move critics said would let banks hide reality from investors.

The accounting changes were credited with helping U.S. stock indexes jump nearly 3 percent higher on optimism the financial system may stabilize in the short term.

Initial euphoria among business lobbyists over the changes was tempered as it became clear FASB had declined to let banks presume that all transactions within a market are distressed just because a market for an asset is inactive.

FASB has taken one step forward and one step back, said Thomas Quaadman, executive director for reporting policy at the U.S. Chamber of Commerce.

FASB deliberated for three hours in a drab boardroom that was filled with dozens of representatives of accounting firms, banks and insurance companies. I think this is an improvement, FASB Chairman Robert Herz said of the changes.

But board members Marc Siegel and Thomas Linsmeier cast dissenting votes on the guidance for how companies write-down assets that have dropped significantly in value.

I'm afraid that this change will result in fewer impairments being recognized, and I don't think that will help the investor confidence in the balance sheet, Siegel told the meeting.

The changes would take effect in the second quarter for most U.S. financial firms, but early adoption could be allowed for first quarter results.


Many 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.

FASB said at its meeting on Thursday that the objective of mark-to-market 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.

Robert Willens, an analyst who specializes in tax and accounting issues, said the changes will help banks cosmetically and help increase their capital levels.

Yet I'm finding the investors I speak to are mostly disappointed because it doesn't change the reality of the banks, he said. This may end up being a dark day in history before it's all said and done. It's a pyrrhic victory.

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.


The accounting board considered hundreds of letters and e-mails sent by banks, investors and others commenting on the FASB proposals.

Herz also said FASB did extensive outreach to investors, particularly major investors in financial institutions ahead of Thursday's meeting.

But FASB members Linsmeier and Siegel sparred over whether to call the writedown guidance ridiculous or ludicrous, and Linsmeier said the board was making changes to address regulatory capital concerns.

I find one of the most unfortunate parts of this to be the fact that we're continuing to take the responsibility on, rather than having the regulators to take this on, said Linsmeier, a FASB member for three years and former chairman of Michigan State University's accounting department.

Siegel joined the board in October. He had led an accounting research and analysis team at RiskMetrics Group that focused on investor-oriented issues.

(Additional reporting by Emily Chasan and Rachelle Younglai in Washington; editing by Tim Dobbyn)