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Stocks Could Surge If Accounting Rule Shifts

Thursday, 19 Mar 2009 12:44 PM

The Financial Accounting Standards Board (FASB) — the organization that determines the ways in which companies are allowed to account for their assets, liabilities, and income (profits and losses) — made an announcement this past Tuesday that could cause stock prices to rise substantially within the next few weeks.

Here's a brief summary of that announcement:

Companies that hold mortgage-backed securities would have much greater leeway in the way that they account for those securities.

Rather than valuing mortgage-backed securities at the prevailing market price of those securities, holders of mortgage-backed securities might be able to value those securities at cost — at the price that they paid for those securities — even if they intend to resell those securities before maturity.

Thus, any unrealized market-related losses in the value of those securities could be reported on a company’s balance sheet as “accumulated other comprehensive income,” rather than on a company’s income statement as unrealized losses.

If the FASB's proposal is approved by its members, holders of mortgage-backed securities (such as commercial banks) would be able to begin valuing a larger portion of their holdings of mortgage-backed securities in the aforementioned way rather than the current marked-to-market way for interim and annual periods ending after March 15, 2009.

If, however, a company determined that it would likely sell its holdings of mortgage-backed securities before recovering any unrealized losses on those securities, it would still be required to report those unrealized losses on the company’s income statement as “other-than-temporary” impairments.

Should the FASB approve the changes mentioned above, commercial banks and other financial institutions will likely soon stop recording massive losses from their investments in mortgage-backed securities. That would be a very positive development for the U.S. equities market, as my experience suggests that stocks of financial companies would soar in the event that the aforementioned changes are enacted.

FASB's members are required to comment on the proposed changes by April 1.

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DavidFrazier
The Financial Accounting Standards Board (FASB) — the organization that determines the ways in which companies are allowed to account for their assets, liabilities, and income (profits and losses) — made an announcement this past Tuesday that could cause stock prices to...
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