Stop Simplifying

The Financial Accounting Standards Board is going to vote tomorrow on changes to the so-called "mark-to-market" accounting rule.

Don't get me wrong. It's a big deal. It could dramatically change the balance sheets of some banks, because they could value their assets at a price other than what they could sell them for today.

But the discussion about the rule is driving me crazy. Everyone is speaking in shorthand that makes the rule seem totally insane.

I keep hearing things like "marking some of these assets to the market value in the current climate makes no sense."

Well, of course it doesn't. That's why the accounting rule DOES NOT ACTUALLY REQUIRE marking to market in all situations. (That's one reason it is properly called "fair value" accounting, not "mark-to-market".)

If the market is distressed, and the thing you want to value just is not trading, the rules allow for valuing the asset using other methods, in some cases using a financial model to calculate how many mortgages or whatever you expect to pay off. This is called "mark-to-model" or "mark-to-myth" depending on where you stand in the debate.

The question is over WHEN the rules allow you to do that. You can read the actual proposal being considered by FASB here.

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