An article yesterday titled ‘Banks applaud planned mark-to-market rules’ says Canada’s Accounting Standards Board unveiled proposed changes Thursday to relax mark-to-market rules that apply to some troubled holdings that have been affected by the market turmoil, making it easier for banks and other companies to avoid writedowns. Why wouldn’t banks applaud this? It will enable them to report better earnings and balance sheets than they otherwise would have to do. That said, a modification to the previously approved U.S. model is that the proposed rule change is only available for debt instruments that companies intend to hold to maturity. Canada will still require securities being held for sale to be recorded at fair market value. The proposed change is a compromise that moves Canada largely in line with recent mark-to-market accounting rules while not fully copying the new U.S. model – but in my view is nonetheless wrong-headed. Essentially what this does is to some degree create ‘lipstick on a pig’ balance sheets, and defers the problem of loss recognition where losses on debt instruments expected to be held in the long term ultimately are realized. It also may, depending on how it is drafted, give Bank managements the subjective ability to place debt instruments in the ‘hold to maturity category’ when otherwise they might not have done this.

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