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FASB piles on; what's next


FASB Piles On, Proposes Mark-to-Market Accounting; Non-Publicly Traded Banks Given Four-Year Delay
The Financial Accounting Standards Board has proposed three accounting changes that will have a tremendous impact on the banking industry, and especially on community banks:
1.   Fair Value:   All financial assets and liabilities – including loans, loan commitments and deposits – are to be recorded at “fair value” on a bank's balance sheet;
2.   Loan loss reserves will be measured on the basis of “expected loss” as opposed to “incurred loss” which is the present standard; and
3.   Requirements for hedge accounting will be streamlined. Certain mark-to-market changes will be reported in earnings, while others will be reported in “other comprehensive income.”
The proposal contained in the exposure draft represents the biggest change ever to bank accounting.   No effective date is specified, but non-publicly held banks with assets under $1 billion will have their effective date delayed for four years.  The deadline for comments on the exposure draft is September 30, 2010.
ABA President and CEO Ed Yingling said that FASB's mark-to-market accounting proposal presents significant problems, not only for banks, but also the general economy.
“If implemented, the proposal would greatly undermine the availability of credit by making it difficult to make many long-term loans, the value of which, even if performing perfectly, would likely be reduced on the day a loan is made,” Yingling said. “The mark-to-market principles in the proposal also conflict with the recommendations of the G-20 and the Basel Committee, and the proposal is also dramatically different from the new International Accounting Standards Board rules, which are based on an entity's business model.
“This puts into peril the potential for convergence of international accounting principles,” he explained. “When mark-to-market (accounting) is misapplied, it increases pro-cyclicality in the financial system -- an important concern and focus of world leaders.  Given the role that mark-to-market has played in exacerbating the current economic crisis, it is hard to understand the rationale for expanding it without regard to the business model.”
Click on the following link to read the exposure draft. 

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