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Friday, Jan 27, 2023
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Local Accountants Dislike Rule on Distressed Assets

More than a month after the Financial Accounting Standards Board (FASB) directed CPAs to use more of their own judgment in determining the value of distressed assets, firms remain uncomfortable with the decision. Locally, CPAs are weighing in with mostly negative reactions to the lowering of a set of accounting standards known as ?air value measurements and impairments of securities,?or mark-to-market. According to one expert, SingerLewak? Jim Pitrat, who is the lead partner of the firm? assurance and advisory practice, mark-to-market accounting was established to more accurately value exotic assets, such as mortgage-backed securities and auction rate securities. But, said Pitrat, FASB was ?viscerated?by Congress for being too stringent with mark-to-market, having forced financial giants such as AIG, with billions in such securities, into freefall when markets for such assets dried up. The new guidelines for mark-to-market accounting take away some of the emphasis on so-called tier-one valuation tools, which, as Pitrat put it, are observable market-price inputs, i.e., the selling price of a stock. At the same time, FASB is emphasizing ?ier three?methods which (again as SingerLewak? Pitrat describes them) unobservable inputs, akin to cash-flow assumptions, which may at best be informed guesses. ? think that this is being forced through political duress,?Pitrat told the media after the decision to relax mark-to-market came down from FASB. ?he forced change may lead into a land of unintended consequences.? He and others in the region? accounting community agree that the industry may have implemented mark-to-market rules too conservatively in the past. But, said Pitrat, FASB caved in under pressure from outside sources, including Congress, at a time when everyone wanted a scapegoat for failures in the financial markets. ?t? really easy for us as accountants to say the value of assets should be the original cost,?said Michael Ciolfi, audit director of Hedman Partners, an accounting firm in Valencia. He believes that those firms who hold distressed assets should benefit from consideration specific to their holdings, but the new guidelines are probably an overcorrection. ?t? kind of scary when there? so much subjectivity and no clear market for securities such as derivatives, as opposed to marketable securities like stocks or mutual funds,?Ciolfi said. In fact, a recent statement from FASB reinforced the subjective nature of last month? changes in mark-to-market, asserting ?the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.? For accountants such as Ciolfi and Petrat, that kind of language is just too vague, leaving them to decide how much something that has no market is worth. ?f a company buys a building you amortize the value, and ask is it worth more or less than what they paid for it,?he said. ?ut there? nothing like that with these securities.? Ciolfi believes conventional accounting standards should be used as much as possible, even on Wall Street. ?ou constantly want to have appraisals done in determining value, using hard numbers, factual data,?Ciolfi said. ?ut when you start using mark-to-market on all or most of a company? assets, there is little credence in their financial statements.? Ciolfi said no company? entire assets are valued using mark-to-market. Nevertheless, he is worried about precedents set by the broader use of the practice in its relaxed form. ?t is potentially a slippery slope,?he said. ?his may be more inline with international standards, but U.S. accountants are a little more constant, a little more conservative.? For his part, FASB chairman Robert H. Herz stands by his organization? ?inal staff positions?on mark-to-market, noting that the decisions were not made without input from constituents. ?e received over 600 written comment letters, many emails, and held many face-to-face meetings and other discussions with a broad range of affected constituents,?Herz said in a formal statement. He noted that, in addition to calling for greater employment of professional judgment on the parts of CPAs in valuing securities, the new directive also calls for more transparency among their clients. ?he changes include a number of new disclosures relating to the determinations of fair value and to estimated credit losses and credit exposures,?Herz said. ?irtually all of the investors providing input expressed the need for greater transparency by banks.? Michael Ciolfi is not persuaded that transparency subrogates the undesirable aspects inherent in the relaxation of mark-to-market accounting. Although his firm has no clients directly holding exotic securities, buried deep within some of the 401k? his firm handles lay some distressed assets. ?ho knows what the real value of these derivatives and these collateralized loan instruments are??he asked. ?his may be a better way do valuation, but it? subject to abuse, and it? so subjective you wouldn? want a company you were considering investing in to do its internal accounting or its filings this way.?

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