An article yesterday titled ‘FASB Plan To Allow Cos More Leeway Under Mark-To-Market’ says “Accounting rule-makers have proposed allowing companies to use more leeway in valuing their assets under “mark-to-market” accounting, a move that could ease balance-sheet pressures many companies say they are feeling during the economic crisis, and that the Financial Accounting Standards Board (FASB) agreed Monday on proposed guidance that would make it easier for companies to use their own models, estimates and judgment in determining the “fair value” of their assets. The new proposal clarifies and modifies when companies can find that trading in an asset has occurred in an inactive market and under distressed circumstances, and in such circumstances would enable companies to use their own valuation techniques in pricing the asset, instead of relying on what they contend are market prices that are temporarily weighed down and unnaturally low. FASB says this approach will require companies to exercise ” significant judgment.” FASB plans a final vote on the matter on April 2, after providing a 15 day public comment period.

I have spent my adult life as a fee earner giving objective opinions on company share and asset valuations. My firm - Campbell Valuation Partners Limited - does that every day, and potentially stands to benefit hugely from such the suggested change. That said, I completely disagree with what FASB is proposing. If implemented, and I am virtually certain it will be (what with U.S. government and SEC pressure on FASB to enable U.S. financial companies to no longer play by the ‘transparency rules’ existing market-to-market rules enforce) the result inevitably will be inconsistent reporting among financial institutions as their managements ‘lipstick up’ their balance sheets and profit and loss statements from what they would be under existing mark-to-market rules. I think this may lead to potential stock market losses for investors whose investment advisors rely on those ‘tarted-up’ financial statements to make financial stock recommendations. Investors savey enough to know that share value ultimately is driven by discretionary free cash flow – which can’t be ‘played with’ – and not by subjectively determined accounting numbers ought not to be hurt by these proposed changes. Less sophisticated investors in my view likely are going to suffer a bad result in the end. Simply put, the world stock markets may go up in the near-term, but changing accounting rules, and hence what financial statements say will not solve the current economic problems. Old sayings are ‘old sayings’ because they have stood the test of time. ‘Figures lie, and liar’s figure’ is a venerable old saying – in my view we are seeing ‘first hand’ the beginnings of application of that old saying.

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