Not so marked to market

Author: | Published: 1 Dec 2008

Enormous losses reported by financial institutions on sub-prime assets have led to vigorous debate over the appropriateness of fair value or mark-to-market accounting. The banking industry and US lawmakers have pushed to suspend or ease fair-value accounting rules, believing that revising the rules could lower the intensity of the credit squeeze. Critics of the proposed changes argue that any gains from divorcing the value of assets from their true market price would be illusory and simply mask huge losses in asset values.

Changes to fair-value accounting under both International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US Gaap) have been on two fronts. First, the fair-value hierarchy, which requires financial instruments to be valued using observable market inputs, where available. Second, the ability to reclassify financial instruments from trading to holding in order to avoid the mark-to-market requirement.

As a result of these changes, companies will be...