Curtain's Rising on Market Value Accounting: The Financial Accounting Standards Board Is Expected to Release Final Language on Its New Market-Value-Accounting Rule This Month. Here's Early Advice on How to Put Your House in Order

By Betzold, Nicholas W., Jr.; Berg, Richard S. | ABA Banking Journal, June 1993 | Go to article overview

Curtain's Rising on Market Value Accounting: The Financial Accounting Standards Board Is Expected to Release Final Language on Its New Market-Value-Accounting Rule This Month. Here's Early Advice on How to Put Your House in Order


Betzold, Nicholas W., Jr., Berg, Richard S., ABA Banking Journal


The Financial Accounting Standards Board is expected to release final language on its new market-value-accounting rule this month. Here early advice on how to put your house in order

In a mark-to-market environment, banks will have to learn how to invest like a casino gambles--with the odds stacked in their favor.

One of the biggest differences between gambling and investing is that at the investment "tables" the odds change over time. Under mark-to-market, bankers will have to have a solid enough grasp of the fundamentals to calculate and recalculate the odds on a regular basis.

FASB's decision. On April 13, the Financial Accounting Standards Board, in a five to two voice vote, decided to approve a new accounting treatment for "Certain Debt Securities Held By Financial Institutions." As of this writing it is expected that this decision will be given a number and implemented for fiscal years beginning after Dec. 15, 1993. (Our deadline was before FASB's signing vote--typically, only a formality.)

After much debate, FASB's final decision was that investment portfolio securities must be re-classified into one of three portfolios:

(1) Investment Portfolio: This is the category that banks traditionally kept most of their investment securities in. Now, however, the test for this category has become much more stringent than in the past. Banks must not only have the intent and ability to hold for the foreseeable future, they must now have the ability and intent to hold to maturity. Securities that meet this test can be held at cost.

Selling held-to-maturity assets with very short remaining terms (three months is given as an example) and selling "tails" of amortizing securities (if less than 15% of original principal is outstanding) are "not considered as inconsistent with [the] held-to-maturity category."

Banks may also sell or transfer a security to another category if there is a significant deterioration in the issuer's creditworthiness, a change in tax law, or a shift in the regulatory landscape.

(2) Available-for-Sale Portfolio: This, according to banker groups, will now become the largest category.

It will consist of any security that bank managers cannot prove they will keep to maturity.

This would include any security that could conceivably be sold due to "changes in market interest rates and related changes in the security's prepayment risk...needs for liquidity...changes in currency risk."

This portfolio will be marked-to-market in a special capital account on the balance sheet.

This is in contrast to the former "held-for-sale" category, which had been accounted for at the lower of cost or market, also known as LOCOM. There is no more LOCOM.

The implications of this category for your short-term and long-term capital plans are significant.

(3) Trading Portfolio: This is the only unchanged category--a place for short-term trading activity. This portfolio is marked-to-market through the income statement.

Bank implications. Regardless of which category a bank's management believes its securities should be placed in, the real question is, "Where will our auditors and regulators require us to place our securities?"

There is tremendous pressure from the Securities and Exchange Commission and others to "motivate" accountants and regulators to take the most conservative approach--from their viewpoint, that is.

"Most securities in the portfolio will have to be recategorized as available-for-sale. But it's not the regulators that will be forcing this, it will be the bank's accountants, once this becomes [a generally accepted accounting principle]," according to Owen Carney, senior advisor for investment securities, Office of the Comptroller of the Currency.

In talking with a number of bankers since the FASB decision, I hear two frequent misconceptions.

The first is, "It won't apply to us. …

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