The following is an open letter of encouragement to the Financial Accounting Standards Board.
Dear board members and staff:
First of all, please accept our thanks for standing firm on the role for market values in financial statements. You didn't wilt under pressure despite one hyperbolic misrepresentation about mark-to-market after another, such as that it created the whole financial crisis, it was mandated by Sarbanes-Oxley, it was implemented in 2008 in the midst of this crisis, and it was abandoned 70 years ago to avoid prolonging the Great Depression. (At least no one is blaming it for global warming, at least not yet.) You also stuck with it after your counterparts in London blinked under threats from the Europeans. Near as we can tell, your changes were basically clarifications to help auditors understand SFAS 157.
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All that's good, even great, but we think you can build a better foundation for the future by making it clear that mark-to-market is only a means to the end, not the end in itself.
THE END
We want to start by describing the end (as in goal, objective and purpose) for reporting values and their changes in financial statements. We know you fully grasp this point, but the public backlash shows that many don't, so perhaps additional clarification is needed from your pulpit.
In particular, we think that many focused on reporting market values as the goal, instead of as a step toward the larger objective of providing capital markets with fully useful information. Indeed, we're convinced that the auditing branch of our profession made this mistake and fixated on amounts that would be easily defensible, even if they don't provide useful representations in the statements.
As a result of their fixation, we urge you to keep reminding everyone that the end for reporting values is providing information that helps users assess the amount, timing and uncertainty of future cash flows related to assets and liabilities. Your predecessors said so in the extant Conceptual Framework, and you have endorsed that objective in your proposed replacement.
THE MEANS TO THE END
The ability to affect the amount, timing, and uncertainty of future cash flows (which we call AAATUC) is the most basic economic essence of all assets and liabilities. Although AAATUC is too abstract to be known or measured definitively, it is the beacon that must guide every phase of the search for useful information. The key point is that AAATUC's existence and magnitude are clearly signaled by values. In fact, values are the best descriptions of AAATUC, because all others are based on obsolete past prices, systematic allocations or unverifiable predictions of future events.
To put it another way: Market value measures are observable and verifiable empirical facts. As such, they are always to be preferred to other compromised methods of putting numbers on events or situations. We think it's time for the board to articulate once again that observable market-based measures of AAATUC are preferable to all others. Even so, these measures are only the means to the end of providing useful information.
