An International Spat Over Bank Bookkeeping

Efforts to establish a unified global accounting standard could be held up by a dispute between U.S. and international groups over how banks should value their assets. The U.S. Financial Accounting Standards Board (FASB) has proposed expanding the use of fair-value accounting—carrying assets at their current market value—to loans and deposits as well as securities. The London-based International Accounting Standards Board (IASB) advocates allowing banks to carry assets at their original value as long as they are holding them for the long term, rather than for trading purposes.

While accounting rules affect all publicly traded companies, the question of how to value financial instruments is particularly important to banks, determining how trillions of dollars of assets are marked on their balance sheets and how much capital they will have to hold to meet new rules agreed to in September by the Basel Committee on Banking Supervision. According to Jason Goldberg, an analyst at Barclays (BCS), FASB's proposal could cause 26 of the largest U.S. banks to write down the value of about $4 trillion of loans on their books by $138 billion.

Former Federal Reserve Chairman Paul A. Volcker (opposite) first introduced the idea of accounting convergence in 2001 as head of the group that oversees IASB. "When you have global corporations operating around the world and analysts looking at them from around the world, you want one accounting standard," he says. FASB argues that forcing banks to reflect the market's take on what their assets are worth would provide the clearest view of their financial condition. That stance is backed by the CFA Institute, an international association of financial analysts. "It will help investors see the true picture," says Sandra J. Peters, head of the institute's financial reporting group.

Some opponents of FASB's approach contend that marking all assets to market doesn't make sense because it can be difficult to establish accurate values for some assets, especially during times of stress in the system. "You can't have everything at fair value," says Volcker. "I'm not in favor of fair-valuing bank loans because we don't know their fair value anyway."

A September survey of 1,000 investors by the CFA Institute found 71 percent favoring fair-value accounting for loans. A June survey of institutional investors by PricewaterhouseCoopers came to the opposite conclusion: A majority of respondents supported IASB's original-cost accounting for loans held for the long term.

Differences over fair-value accounting affect calculations of how much capital banks need to hold as a cushion against losses. Without a uniform standard for valuing assets, a U.S. bank and a European bank with identical loans could end up being required to hold different amounts of capital.

Members of the two accounting bodies have met monthly, and sometimes weekly, since 2006, when they agreed to work toward unifying standards. Most disagreements are close to being resolved, according to people with knowledge of the discussions. If the two sides cannot find a middle ground on financial instruments and are unable to agree on unified standards, the U.S. Securities and Exchange Commission will have to decide whether to allow U.S. companies the option of using IASB's standards. The SEC has said it will rule on that by the end of next year.

The bottom line: A dispute over applying fair-value accounting to financial assets could hold up a global accounting agreement.

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