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Opening comments by Hon. Paul E. Kanjorski
[chairman of the subcommittee]
'We meet today to examine the much-publicized and hotly-debated mark-to-market accounting rules. A diverse range of opinions has gathered for what I hope will be a thoughtful and constructive discussion. Previously, I have taken the position that the Congress should not interfere through legislation in the area of establishing specific accounting rules. It seemed best that such technical work be left to the regulators, standard setters, and financial experts.'
1) Summarise the views of each of the participants in Panel 1 (http://archives.financialservices.house.gov/Hearings/hearingDetails.aspx?NewsID=1290)
- The Standard Setter
- Robert H. Herz: Chairman Financial Accounting Standards Board (FASB)
- The Banker
- Thomas Bailey: President and CEO, Brentwood Bank
- The Politician
- Paul E. Kanjorski: Congressman
2) To what extent do you agree with the view expressed that fair value accounting has been pro-cyclical and has therefore contributed in part to the severity of the global financial crisis.
3) Is the fact that the FASB shortly after the hearing eased the rules a cause for concern?
I would now be starting the summary of the following participants who have participated in the hearing conducted on March 12, 2009, with respect to the issue of Mark to Market accounting rule. The main objective of this hearing was to understand the negative impact of the accounting rule on the present economic situation.
Robert H. Herz: Chairman Financial Accounting Standards Board (FASB)
The testimony of Robert Herz mostly involved about the importance of quality financial reporting for both public and private institutions. It has also looked into the situation about fair value accounting or mark to market accounting and has made his observations on account of the Financial Accounting Standards Board (FASB) as to why certain sections of the committee are recommend modifications to the same.
Robert Herz realizes that the function of accounting reporting standards and regulators may be different but he also stresses the point that the importance of quality financial reporting cannot be sacrificed. He emphasizes the importance of the FASB as an independent organization and its responsibility in setting such accounting standards which would provide investors with reliable financial statements. (Herz, 2009)
He emphasizes the fact that the decision making of various investors with respect to the allocation of their resources rely on the authenticity of the financial statements. Hence, it is the responsibility of the FASB to provide the same to various investors. However, the main concern of the regulators is financial stability in the present economy and the FASB along with the regulators try to bring about a balance in the same.
He stated that Fair value accounting is normally used in order to evaluate the present value of an asset in the current economy. He also stated that Fair value accounting cannot be termed as a reason for the recent economic crisis and stated the criticality of reliable information for the investors in the present economy. (Herz, 2009)
He underlined the fact that mark to market accounting is mostly used for certain financial assets like trading securities and derivatives. The impairments are normally difficult to evaluate for illiquid assets. However, none of the value of the assets can be gauged on the basis of historical costs which may tend to overstate their values in the current economy.
Herz stated that Fair value accounting is used in cases of orderly transactions and not in cases of forced liquidations or fire sales. Although mark to market accounting in this present illiquid market may be difficult to implement, it would be unadvisable to completely do away with the method. If one completely avoids fair value accounting in the present scenario, it would shake the confidence of investors and would trigger a panic owing to the eroding confidence of investors.
Herz stated that the FASB has been trying to provide more additional guidance on the current valuation of assets, especially in the illiquid markets, with the help of various roundtables and conferences with experts from capital markets, auditors and investors. They have been trying to take the perspective of various stakeholders and constantly bring about certain modifications needed in current accounting standards.
He believes that the valuation of assets in the present illiquid market may be not followed in the right way due to the difficulty in evaluating the necessary information and bringing about a sound judgment. Although the FASB is fully committed to the importance of this accounting rule, it will try to provide guidance to the various stakeholders in the assessment of the valuation of an asset.