Accounting body moves toward giving banks more flexibility on fair-value

The Financial Accounting Standards Board, pressured by lawmakers to change the fair-value rule blamed for worsening the financial crisis, proposed permitting companies to use “significant judgment” in valuing assets.

Companies would be able to apply the revised rule to their first-quarter financial statements, FASB Chairman Robert Herz said Monday during a meeting at the U.S. accounting rule maker’s Norwalk, Conn., headquarters. The board is set to vote on the proposal April 2, after a 15-day public comment period.

Herz told members of the House Financial Services Committee at a hearing Thursday that he would try to have a proposal for revising the rule ready within three weeks. Herz was responding to calls for quick action from Rep. Barney Frank (D-Mass.), the committee chairman, and Rep. Paul Kanjorski (D-Pa.), who leads the panel’s capital markets subcommittee.

Fair-value, also known as mark-to-market, accounting requires companies to set values on most securities that they own every quarter based on market prices. Wells Fargo & Co. and other companies argue that this rule doesn’t make sense when trading has dried up because it forces banks to write down assets to fire-sale prices.

“Mark-to-market is fundamentally not about a quote on a screen,” Wells Fargo Chairman Richard Kovacevich said Friday. “It should always be about expected cash flows.”

Investor groups and the accounting industry say the rule forces companies to reveal their true financial health to shareholders.

Most financial assets are not valued using fair-value accounting. For example, General Electric Co. told investors this month that 2% of the assets of its GE Capital Corp. finance arm are valued based on market prices.