Accounting Changes: For Better or For Worse?

The Dow soared across the 8000 mark today as new accounting standards were set in place by FASB. These changes, led by mark-to-market, are supposed to help banks value their assets to a closer true value. Altogether, these changes were made to give investors a better perspective of how these banks look on a balance sheet.

Mark-to-market is the most talked about of these accounting changes. Mark-to-market require that assets must be put on balance sheets to the current market valuation. For instance, if Bank of America had to foreclose on a house that was bought for $400,000, that $400k was the amount put on the balance sheet. However, the housing collapse caused that house to now be worth $250,000. Mark-to-market makes the balance sheet look like it lost $150,000 in assets. These sort of valuations caused balance sheets to look completely out of whack. This has caused banks to have a lot of write downs as they struggle through the housing and financial crisis. Changes call for the balance sheet to reflect the original $400k instead of writing down to reflect the current value.

Changes this rule is supposed to be a good thing as balance sheets look stronger and investors would be willing to put more money in as these companies look less risky. This would free up capital and stimulate lending. On the other side, these banks would not look as undervalued and investors might not want to put money back in financials. Balance sheets would lose appeal as they do not reflect true values.

I think balance sheets should reflect current values. If they don't, we are investing on a lie. These companies are in worse shape than we can now see. However, we cannot prevent this rule from changing so as long as the market jumps in reflection of said changes, I will not complain. You might not agree with everything happening on Wall Street, but there are plenty of ways to capitalize on these decisions and make cash money.