FASB’s Herz to Allow ‘Significant Judgment’ in Valuations

--FASB relax mark to market rule and allow significant judgement in valuing assets. 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 yesterday during a meeting at the U.S. accounting rule maker’s Norwalk, Connecticut, headquarters. The board is set to vote on the proposal April 2, after a 15-day public comment period. “I’m a mark-to-market guy, but it really works best when we have fundamentally sound markets,” Herz said at the meeting. “We’re trying to be responsive and also responsible.” Herz told members of the House Financial Services Committee at a March 12 hearing he would try to have a proposal for revising the rule ready within three weeks. He was responding to calls from Committee Chairman Barney Frank and Representative Paul Kanjorski, the Pennsylvania Democrat who leads the panel’s capital markets subcommittee, to move quickly after financial companies worldwide reported more than $1.2 trillion in writedowns and credit losses since the start of 2007. FASB Board member Tom Linsmeier said he was “frustrated by what happened in Congress last Thursday. The assertion was that we had done nothing. That is not the case,” he said, referring to previous fair-value guidance released by FASB. “People have a difficult time with judgment, and we want to make sure they’re using judgment,” board member Lawrence Smith said during the meeting. The board yesterday also voted 3-2 to propose a change in how companies determine if securities have suffered “impairment.” If a company doesn’t plan to sell a security and isn’t likely to have to sell it, the business typically wouldn’t have to take a writedown. The proposal, which was chosen over another presented by the FASB staff, adds “so much subjectivity to the process that it’s giving a blank check to managers to manage earnings,” Edward Ketz, an accounting professor at Pennsylvania State University in State College, said in an interview. The proposal will be considered at the April 2 meeting.