Market-value or historical cost accounting.

• Position: New accounting standard by Financial Accounting Standards Board - Panel Discussion

"Market-value accounting" is a hot buzzword this season in financial circles and regulatory bodies. With the increasing concern in the public and private sectors about the adequacy of financial statement reporting by financial institutions, market-value accounting concepts have received considerable attention from the Congress, the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC) and others as a possible means to improve financial reporting. There is widespread belief in some quarters that the current use of historical cost accounting by banking institutions has been a contributing factor in masking both the true value of their assets and the need for further intervention by regulators, especially those seeking to limit federal insurance fund losses. Other ramifications of the current-value accounting initiatives may be of concern to state and local government finance officials.

The issue surfaced in 1986 when the FASB began a project to consider comprehensive disclosures about risk, liquidity, interest rates and market values of financial instruments. A FASB exposure draft was circulated in December 1990 proposing a standard that would expand market value disclosure requirements to many types of financial instruments. The final FASB standard, Statement No. 107, Disclosures About Fair Value of Financial Instruments, was issued in December 1991. This standard, with some exceptions, requires all entities to supplement their historical cost financial statements with disclosures about the fair values of financial instruments reported in those statements. The standard will be effective for calendar year 1992 financial statements, except for companies with less than $150 million in assets; these companies have an additional three years to comply.

The FASB undertook a related project in June 1991 to consider an accounting rule that would require holders of debt securities for investment purposes to record those securities at market value in their financial statements. As of January, the board was considering issuing an exposure draft on this rule.

Other initiatives in current-value accounting also came to the fore in January with a Wall Street Journal headline: "SEC Renews Call for Pressure on Banks and S&Ls to Update Accounting Rules." This report highlighted a speech by the new chief accountant of the SEC in which he reiterated his long-standing interest in market-value accounting and added a new sense of urgency to the debate by revealing the SEC's impatience with the rule-making process. The SEC has authority over accounting rules, but gives day-to-day responsibility for the standards to the FASB. The SEC's new chief accountant praised the FASB standard issued in December 1991, but emphasized that because it requires only note disclosure, it does not change the balance sheets. This is not informative enough for most investors, he asserted.

Federal Reserve Board Chairman Alan Greenspan entered the fray in February when he was questioned on market-value accounting by Senator Jim Sasser at his renomination hearing. Greenspan raised both economic and technical concerns in arguing against market-value accounting and pointed out the inimical results which he foresaw for securities issued by small municipalities if the SEC's plans were put into effect.

What do GFOA members think of these initiatives, and what effect might the...