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September 02, 2010


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David Merkel

Saw this today, thought you would like to see it:

Why the SEC Won't Flip the IFRS Switch

Felix del Gato

Herz was the primary mover behind the reduction in the number of Board members, which move also included providing the chair with more discretion in setting the agenda. I have not seen if that power is be taken back, but I would suggest that the reduction in agenda setting authority may have something to do with RHH's early departure. Your comment regarding FAF making the final call of FV may be correct, but may also run afoul of FAF's charter, which says the Foundation cannot set standards. So, I guess they could try indirectly, but that would be a most unusual move.

J Hale

Fair Value and M2M for a bank’s assets doesn’t make sense to me. For example, it if a banker negotiates a jumbo mortgage with a borrower, then it would seem that the transaction itself establishes the fair market value of the loan (willing buyer & willing seller, between the bank and the borrower), rather than the exit price (fair value). Under the M2M system, the only loans a bank could afford to make would be when there is an active secondary with little if any discount, such as loans that conform to Fannie and Freddie’s standards. Banks cannot afford to make loans that have to be immediately marked down to exit price.

M2M for liabilities seems to be counter-intuitive. For example, if the institution’s credit rating declines, the market value of the liabilities declines and the difference is phantom income. So a bank’s credit rating drops from “A” to “BBB” and their debt is less desirable. The reduced M2M fair value is non-cash income. Or another example, if TARP contributes to a bank, then one would think that the credit rating would improve. Unfortunately any credit rating improvement creates phantom M2M losses from the increased market value of the bank’s liabilities. Such losses flow through the income statement and decrease equity. (If a company’s credit rating improves, it would theoretically cost more to buy back its’ own liabilities. Fair Value accounting flushes this through the income statement as a loss.) TARP gives a bank money and this action indirectly increases the phantom losses. How’s that for counter-intuitive?

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