Will someone please explain why the SEC is considering lifting this rule? I do not fully understand the reasoning behind this. There is some chatter out there that suggests that this would be beneficial to distressed financial institutions also. Would you guys mind shedding some light on this for me if possible?
Thanks!
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Mark-to-market accounting is an idea that is better in theory than in practice. The idea is that since a market is the best indicator of the value of an asset, that is the value that firms should use when determining balance sheet values. In 'normal markets' with liquidity and many buyers and sellers, mark-to-market works very well. The problem is that in times of stress (like right now), markets are not as efficient as there is an imbalance of buyers vs sellers and/or a stunning lack of liquidity, which makes market prices less viable (for instance, how good is a market quote on a multi-billion dollar debt obligation when there is only one bid and its for a million dollars worth of the asset).
In the post-Enron/Arthur Andersen world, auditing firms are incredibly risk averse (from a reputational perspective), and so place valuations under intense scrutiny. They are incredibly reluctant to sign off on any financial statements that could later be called into question. This puts further downward bias on the valuations used for reporting.
The idea behind suspending mark-to-market accounting is that if (and that's a big IF) a firm has the wherewithal to hold the asset to maturity, why should it have to use 'artificially distressed', illiquid market prices to mark its assets if it is going to be able to hold them to maturity. The firm can simply collect the coupons and realize the full face value at maturity (making regular reserves if a loss seems probable). However, the difficulty is how to apply that standard. Remember a couple quarters back, when the first mark-to-market losses hit AIG, Sullivan was saying this was nothing to be concerned about since they were 'only' mark to market losses, and since AIG would be able to hold the assets to maturity, there should be no permanent loss.
In my opinion, this is one of those issues with no good answer.
Nice explanation dcmonkey.
I just wanted to add that when you write down your assets then you have to write down the right side of the balance sheet. Obviously your liabilities don't change in value because of the writedown, so companies have to write down their equity.
If you take a financial institution which is leveraged 30:1 (which was about typical for investment banks), if you write down your assets by a measily 3% then you wipe out your entire equity. Since banks have minimum capital requirements they have to raise new capital or risk becoming insolvent.
BTW, where did you hear that they are lifting FAS 157? I thought FASB or SEC already issued new guidance a couple months ago, saying that companies could use "judgement" when markets don't reflect "fair" prices.
I think this is an excellent question, but you have to back up a little to understand what the whole issue around mark-to-market is about...
Recently, November 13th was the deadline that the SEC gave for public comments on mark-to-market accounting. The SEC requested these comments as part of a study related to the "Emergency Economic Stabilization Act of 2008." The comments and the study are "milestones" that the SEC is monitoring before potentially mandating adoption of IFRS. Also, the SEC won't make a formal determination on mark-to-market until January 2009.
So... the broader issue around mark-to-market accounting is the momentum around adoption of IFRS and the provisions within IFRS for reclassification of assets. It is anticipated that in the next 2-3 years, "early issuers" or "accelerated filers" (as defined by the SEC based on market cap guidelines) will have transitioned from GAAP to IFRS. It is estimated that by 2016 most companies will move IFRS reporting standards.
Bear in mind, many countries such as Australia, Canada and the European Union are already on IFRS and there is pressure for the US to get in step with what the rest of the world is doing.
In October, the International Accounting Standards Board and in turn, IFRS, declared that current market conditions are "rare" and so retrospective reclassification of financial assets should be allowed. Companies love this. Why?
Simply put, if you can reclassify assets into the category of "Held-to-Maturity" then they don't have to be marked-to-market and companies absolutely LOVE that.
The recovery from this market volatility, the transition from GAAP to IFRS and all the chaos that this involves... is part of many many reasons why I and others believe it will take us at least 7-8 years to recover from this fiasco. A long time.
Don't get me started on a discussion of the Euro surpassing the USD as the international currency du jour... that one's another fiasco.
Guys thanks for the great answers! This really helps a lot in understanding the broader issue. @stk123: At some point over the last few weeks this issue was mentioned on CNBC. It just dawned on me that these forums might be a good place to get it sorted out!
Avoiding mark to market rules is another way for these greedy, accomplish-nothing wall streeters to lie about their firm's worth. If companies can avoid using mark to market, they can tell us what an asset could be worth if some conditions that are unlikely to occur do occur, instead of what the asset is worth(and usually it's worth close to nothing if they're trying to avoid valuing it properly).
Mark to market pricing for Physical forward (Originally Posted: 09/17/2014)
Hi, any experts have experience or guides on the mark to market pricing for Physical forward on a refined oil product?
Based on what i know, we have to look at an underlying basis price and apply premium /discount. Need more insight on this.
Thanks
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