Accountants struggle with how to value bank assets and liabilities

Reuters reports on how the accounting profession is struggling with how to have banks value their assets and liabilities so that they present a fair picture of each bank's current financial condition.

This is a classic example of what I call the 'lost in translation effect'.

As banks move from historical cost of the individual asset, liability and off-balance sheet exposure details to fair value of these exposures for purposes of financial reporting, most of the relevant information is lost.

For example, one way that the information is lost is mark to make believe for exposures for which there is not a deep, liquid market.  Another way that information is lost is regulatory forbearance under which the banks engage in 'extend and pretend' and change non-performing loans to 'zombie' loans.

Regardless, the struggles of the accounting profession highlight why banks should be required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this information, market participants can mark these exposures to market and adjust the financial statements so they present a fair picture of each bank's financial condition.