“A new accounting guideline could force financial-services firms to take big write-downs in their investment portfolios just as rising interest rates threaten the value of their bond holdings,” wrties David Feldheim in today’s Wall Street Journal.

“This quarter, the Financial Accounting Standards Board plans to enact guideline EITF 03-1. The ruling creates stricter requirements on how and when firms must recognize losses in their investment portfolios and could spawn significant hits to earnings.”

“In response to the ruling, several banks and trade groups, as well as mortgage-financing company Freddie Mac, have written to the FASB asking for further discussion and a delay of the effective date. These firms complain that the rule has the potential to require substantial write-downs on their entire portfolios because of its vague wording on what qualifies as a loss requiring an immediate charge.:

“The FASB is considering reviewing the issue in the near term, and may give companies additional guidance on how to apply the rule.”

“ ‘A stricter interpretation of the new rule could result in more write-downs’ in the securities portfolios held by mortgage lenders, brokerage firms and insurance companies, says Chris Senyek, an accounting analyst at Bear Stearns.”

“Financial-services firms, as part of their risk-management strategy, tend to hold large amounts of stock and bond investments, labeled as ‘available-for-sale’ securities. These bond holdings are subject to losses when interest rates rise. For banks and accountants, though, just how the ruling will translate from theory to practice remains to be seen.”

“In its letter to the FASB, Freddie Mac, the nation’s second-largest buyer of home mortgages, said bond holdings ‘may frequently be in unrealized loss positions due to changes in interest rates,’ and it could be difficult to forecast when the securities would return to their original costs. In 2003, Freddie Mac booked nearly $5.9 billion in losses on its $581 billion of available-for-sale securities.”

“The American Bankers Association also says the rule is too harsh. In its letter, the group voiced concern over some accountants’ highly conservative interpretation of the rule, under which firms would have to take charges on all securities in its portfolio even if it sells only one bond below market value. “We disagree with this interpretation,” the group wrote, adding that such an opinion could hurt banks’ risk-management practices by discouraging them from selling securities if the result is a write-down of the remaining portfolio.”