vaughn

Congress Pushes M2M Reform: Suspension Unlikely, Revisions Guaranteed

Not all assets are mark to market, only level 1 assets with the active market price is mandated to use market price to mark. Level 2 and 3 are not marked to market based only on market price because market price for these assets are not fair price resulted from an active market.

The problem is: Auditors don't want to assume responsibility and they don't want to do the hard work by evaluating the value of assets going through various credit analysis, etc. So, auditors push to value level 2 and level 3 solely based on the market price which is totally out of whack due to illiquid market and thinly traded, manipulated market. so long as the market price is used to value level 2 and 3, auditors feel safe because the market price for these level assets during economic crisis is extremely distressed and thus the value of assets are extremely low.

The fix on the mark to market rule is simple: Just mandate the market price is not applicable to value the assets of which no representative market existed and no fair transaction price can be found. Thus will force auditors to do the hard work by evaluating the value of assets based on the credit analysis, cash flows, etc.

The problem is not in the FSAB #157 which does not mandate to use market price to value all level of assets. The problem lies in the auditors signing off the financial statements: They don't want to take the risk and they want to use the lowest price to protect their own butt, citing the consequence of Authur Anderson after the debacle of Enron.

Only when the FASB forces the auditor to assume the responsibility by mandating market price is not appliable in certain situations and shall not be considered, then the true spirit of FASB #157 fair value accounting (Yes, it is called fair value accounting, not mark to market accounting) can be implemented.

Look at Citigroup. It is said Citigroup reported a $10 billion net income and paid $3.5 billion tax to IRS for fiscal year 2008 while it reported over 40 billion loss due to mark to market practice imposed by its auditors.