Changes in fair value in the debt of U.S. banks, which have caused multibillion-dollar swings in the earnings of lenders such as Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM), soon may cease to show up in net income.
Gains and losses resulting from the changes, known as debt valuation adjustments, should appear in other comprehensive income instead of earnings, the Financial Accounting Standards Board decided in a meeting last month. Christine Klimek, a FASB spokeswoman, said the group probably will release a proposal in the fourth quarter and a public-comment period will follow.
The accounting rule that resulted in debt valuation adjustments, or DVA, was adopted in 2007. It allowed companies to designate some of their liabilities as fair value, meaning that the firms would book gains when the price of their debt fell and losses when it appreciated.
Morgan Stanley is estimated to have a gain of $1 billion tied to DVA in the second quarter after it had a $2 billion loss in the previous three months, according to Charles Peabody, a Portales Partners LLC analyst. New York-based JPMorgan had a $900 million loss in the first quarter and could post a gain of $500 million for the second period, Peabody estimated.
The rule, enacted after New York-based firms including Morgan Stanley and Goldman Sachs Group Inc. (GS) lobbied for it, has been criticized for producing results that run counter to banks’ actual performance.
Morgan Stanley Chief Executive Officer James Gorman, 53, last year called the standard a “bizarre accounting anomaly.” Chris Kotowski, an analyst at Oppenheimer & Co., said in a note last month that the rule “remains our nominee as the single worst accounting standard ever.”
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