FASB Eases Mark-to-Market Accounting Rules

Accounting standards for U.S. financial institutions were eased on Thursday when the U.S. Financial Accounting Standards Board recommended allowing firms to use "significant' judgment when valuing toxic assets on their books.

Analysts interviewed by Bloomberg said the move could increase net income for financial institutions by as much as 20%, by significantly easing the hit that financial institutions have had to take on so-called toxic debt on their balance sheets.

"Cynics will claim this is a thinly veiled attempt to disguise the seriousness of the financial crisis and losses being faced," said Marc Chandler at Brown Brothers Harriman. "On the other hand, there are many who see the mark-to-market as an unreasonable demand for financial instruments with no markets."

Indeed, over the last several quarters, market participants have argued that interest in toxic assets, such as mortgage-backed securities, has essentially dried up, meaning that firms have had to value some assets as worthless even though they could eventually regain their worth.

The decision also comes ahead of earnings season, with the first quarter of 2009 having ended last week, and with Alcoa expected to release their report on Tuesday. The FASB also said the decision will be retroactive, allowing firms to take less writedowns.

Furthermore, analysts have argued that the decision will reduce the effectiveness of the U.S. Treasury's Public Private Partnership Investment Program, whereby the government will back the purchase of toxic assets.