Subject: File No. 4-573
From: Delphine Tchingambu

November 12, 2008

Study on Mart-to-Market Accounting

The Government has offered loan to help bailout financial institution affected by the financial crisis and expose to high risk of bankruptcy. In return, he asked the Security Exchange Commission (SEC) to study the impact of the Mark-to-Market impact in the crisis and give him alternatives solution that will protect companies asses and public investment. This paper will provide my comments based on some experts study on the effect of this accounting standard on the financial institution balance sheet and on the quality of information available to investors. It would also include comment on the process used by the Financial Accounting Standards board in developing accounting standard, the advisability and feasibility of its modification and finally alternative to the Mark-to-Market standard (statement No 157).

1-Effects of such accounting standards on a financial institutions balance sheet

The Mark-to-Market (MTM) accounting rule requires organization to use the fair value to record their assets or financial instruments. Under this standard, assets are measured and recorded in the balance sheet at the price that would be received in a market sale transaction at the measurement date (FASB No 157, p. 2). The values of these assets follow the market value of financial instruments and accordingly fluctuate with the current market value. Therefore, financial institutions must constantly reevaluate or devaluate their asset values to be in conformity with the MTM accounting rule. Managers must consider the advantageous of the market before they buy or sale assets if they want to maximize their profit or minimize their cost. The value of these assets in this case is reflected on the balance sheet and reported in the financial report at a current value that is attractive to potential investors. The financial crisis has plunged the market to the point that financial instruments lost almost all of their values. In organizations balance sheet, devaluated assets make it harder to sell them in a market lacking liquidity. Companies are forced to keep these assets in their books at no or low value or to write them off with the MTM accounting rule.

2-Impacts of such accounting on bank failures in 2008

This rule is also blamed for the financial crises. Many experts believe that banks and financial institutions would better control their risk of exposure of losses without the MTM rule. The fallout of the housing market has increased the number of foreclosure with the defaulted mortgage payment. Consequently, the value of all mortgage and all mortgage-related securities also declined since the housing collateral protection these securities are worthless. (Forbes, Gingrich). Banks in financial distress try to raise capital by organizing fire sales of their assets at a market –bottom price which become the new standard for valuation of all similar securities held by other companies using the MTM rule (Gringrich). As the capital value decline, banks have to struggle to maintain a capital required by regulation and their only option is to sell more assets that have been markdown to raise money. In addition, Banks dont lend money to each other after they have lost confidence in other banks to face their financial obligation. Experts consider the MTM accounting rule as one of the leading factor to this financial crisis. Berry form Bloomberg.com said in the midst of this financial crisis, mark-to-market isnt necessary telling the truth. Assets priced on the basic of what would bring if sold today even if the bank doesnt have to sell them, create a paper loss that reduce capital and restrict lending (Berry). Milton Friedman and Anna Schwartz of the national bureau of economy research writing for Bloomberg said nobody wants to buy companies stocks that are worthless or has no values. the impairment in the market value of assets held by banks, particularly in their bonds portfolios, was the most important source of impairment of capital that caused them to shut down, not default of specific loan or specific bonds issues. Both experts argue that during financial panics, forced assets sales bring down good assets (Friedman).

3- The impact of such standards on the quality of financial information available to investors.

The blame of MTM accounting rule on the quality of information is due to the fact that organization disclose financial information that do not reflect the true economic value of the assets. The current crisis has forced companies to markdown their asset values under the MTM rule. Stockholders fearing to lose their share if the company goes bankrupt try to sell them to investors reluctant to involve themselves in a risky transaction. Some financial experts argue that even if they change the MTM accounting rule which will enable banks to make their balance sheet look more attractive, investors will still not be enthusiasm to buy share in company where there isnt as much information about their true financial condition (Isidore). The issue here is to see how the MTM impact the quality of financial information disclosed by companies. Before the crisis, this rule has more transparency in the reporting of financial asset by preventing companies from any manipulation of the current value. Isidore in CNNMoney said the MTM rule force companies to honestly disclose what they own and how much of those investment are worth. Changing the rule would make it tougher to come up with a bank real value and will encourage managers speculation (Isidore). Investors will quickly understand that the new valuation method adopted by companies is a means to escape from a rigid system to a more flexible and more profitable one for them.

4-The process used by the Financial Accounting Standards Board (FASB) in developing accounting standards
FASB use the following process in developing accounting standards. The board receives requests for action on various financial accounting and reporting topics from its entire constituency including SEC. The request of action could be for a review of exiting standard or for development of new one. The board seeks for information and advice from many others organizations and groups such as Accounting standards Executives Committee (AcSEC) or the Auditing Standards Board of AICPA, the Public Companies Accounting Oversights Board (PCAOB) or International Accounting Standards Board IASB). The board also makes the project agenda available for public comment. The board staffs, after intensive research analysis and recommendations prepare a written material that is presented to the board. An exposure draft for public comment is issued after the board meeting reach conclusion on the issues. Then the board vote on the exposure draft limited to a specific period time. At the end of the period, after considering all the alternatives, the board vote on a final document and the pronouncement is adopted at a simple majority (FASB).

5- The advisability and feasibility of modification of such standards
The MTM accounting rule has been successful in the past and changing this rule might not solve all the current economic difficulties. Others factors have contributed to the financial crisis that should be considered in finding its solutions. Besides, companies using MTM accounting rule has earned profit when the market was successful. In addition, there is a risk of manipulation of the asset value from the management if the MTM rule is no longer require to measure financial instrument. Increasingly, investors will lose trust on financial report that does not reflect the true value of the companys financial position. Moreover, each bank will rely on its proper internal model to value bad assets on balance sheet and investors will no longer be able to compare financial statements of various firms. Therefore, any gain in securities instrument could be an illusion (Yousfi, MoneyMorning). Other experts in the Moneymorning said suspending the MTM rule will allow corporate executive to falsely protect their companies share prices and protect their own salaries and bonuses. This current crisis has revealed that financial institution were holding some value-less, toxic asset on their books and would try to get rid of them as soon as the market pick up back and money start to flow(Yousfi) . On the other hand, the government who believe that those assets will worth something soon has bought them in his rescue plan and will hold until the markets improve (Isidore). Their main concern is to be able to place a value on these assets and clean their balance sheet. SEC could find a temporary solution to help bank reevaluate their asset during this financial crisis and not extend it once the crisis is over so that a close control on real asset value will be fairly disclose in the financial report (Isidore).

6-Alternative accounting standards to those provided in such Statement number 157

The use of estimate of the asset fair values is being suggested by Weil in Bloomberg.com as a solution to resolve the MTM accounting rule in recording assets. She said many companies have already been using estimate of future cash flow in footnotes financial statement from loan to stock-option cost (Weil). Investors are fully capable to understand that estimate value change all the time and will prefer this solution than to not have reliable information on the value of their stocks. The use of management estimate that incorporate current participant when the active market does not exist could include risk premium (WebCPA). This option could also include the SEC guidelines that will help auditors price more accurately assets that are difficult to value under current market conditions (WebCPA).
The SECs option to let companies inform their investors when they think the market value of their plunging asset dont reflect the holdings actual worth is already being implemented according to Weil. He said such disclosure could be found in the footnote financial statement and in their discussion-analysis section of their SEC report (Weil).

The Mark-to-Market accounting rule blamed for the financial crisis and the fallout of financial institutions asset values is already relaxed in some European countries standards. FASB might have to follow this adjustment to improve and update the convergence of its standards with the international one in the ongoing project.

Sources:
Berry Jones (10/13/2008) Reverse Leverage of Mark-to-Market Wrecks Banks Retrieved on 10/18/2008
http://www.bloomberg.com/apps/news?pid

Burns Judith (10/29/2008) SEC Gets Conflicting Advice on Mark-to-Market Accounting Dow Jones Newswire retrieved on 11/3/2008
http://www.money.cnn/news/newfeeds/articles/djf500

Financial Accounting Standard Board. Facts about FASB. How Topics are added to the FASBs Technical Agenda and Developed Retrieved on 11/5/2008
http://www.fasb.org/facts/index.shtml

Gingrich Newt (9/29/08) Suspend Mark-to-Market Now Forbes retrieved on 10/21/2008
http://www.forbes.com/2008/09/29/mark-to-market-oped-cx__ng_0929gingrich_print.html

WebCPA staff WebCPA Washington DC (10/9/2008)
http://www.webcpa.com/article.cmf

Weil, Jonathan Dont Blame Mark-to-Market for Banks Problems Retrieved on 11/4/2008
http://www.bloomberg.com/apps/new?pid

Yousfi, Jennifer (10/8/2008) By Relaxing Mark-to-Market Rules, has the U.S. Switched off Financial Crisis Early Warning System? Investment News: Money Morning Retrieved on 11/4/2008
http://www.moneymorning.com/2008/10/08/fair-value-accounting