As If Accounting
Do reasonable Americans today regard housing markets, credit markets, stock markets or collectibles markets to reflect accurately the fair value of their homes, corporate bonds/equity and collectibles? My guess is that a large number could honestly and in good faith say “no, that they do not,” whether correctly or incorrectly. Many might say instead that at least some of these markets are at least periodically distressed (or even inactive in the case of collectibles and some housing markets) and that related prices, if any, “really represent distressed sales.”
If so, according to the logic of new accounting rules the country’s independent accounting standard setter adopted last week, valuation of these items may not accurately be ascertained by using recent comparable home sales or trading prices for corporate debt and common stock or auction sales of collectibles. Instead, they could be ascertained by reference to the owner’s own judgments about what those assets would sell for in an “orderly transaction” and “active market.”
The accounting body (the Financial Accounting Standards Board) last week gave analogous authorization to corporate America (and FASB’s London-based counterpart is being pressured to follow suit). In its plain English version of these new rules, FASB says they are designed “to figure out fair values when there is no active market or where the price inputs being used really represent distressed sales.” FASB continues: “The objective is to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) .”
Although the rule imposes technical restrictions on use of this judgment based valuation, by its logic, if not its sometimes technical language, if people who own homes in economically distressed neighborhoods and debt obligations or common stock of, say, AIG or Citigroup, or other distressed companies, or fine art that simply can’t be sold today, their own personal financial statements may be more accurate if they reflected assumed exchange values in “orderly transactions” rather than the effects of related “distressed” conditions or “inactive markets.”
Accordingly, a large number of people whose net worth appeared to have declined precipitously from say September 30, 2008 to March 31, 2009, can revalue their assets upward. Just because your shares in Citigroup or AIG trade for a few hundred pennies or less, you are entitled to make your own different judgment about what they are really worth. Just because no homes have sold in your region except at fire sale prices half what they were a year ago, you may assume that your home is worth the amount for which your next door neighbor sold her comparable place a year ago absent the distressed conditions. Collectibles can be valued based on an owner’s judgments, even if no one would buy the items now.
On the other hand, of course, even if Citigroup values its assets using a version of this as-if method of accounting, I doubt it will give high credit scores to credit applicants using analogous methods. For me, I think I am better off recognizing that my net worth has fallen nearly by half the past half year, than pretending it is worth twice what current conditions manifest. That remains true even though I also believe that some assets may be selling at prices representing some discount to their intrinsic value.