There is no doubt that mark to market accounting rules have contributed to the current “banking crisis.”

In simplest terms mark to market accounting rules cause the banks to have to adjust their assets once per quarter to the fair market value.

With foreclosures on the rise and real estate values decreasing nationwide this has forced the holders of these mortgages to “write-down” their assets.  When the asset is “written-down” the asset account is credited (Which lowers its value) and an expense account is debited.  This means the company will have to acknowledge the loss in its current profit and loss statement.

Due to the recent “housing crisis” the Securities and Exchange Commission has issued a statement clarifying some of the Fair Value Accounting rules.

One of the items that has made the current crisis worse is the fact that no one is currently purchasing “risky” mortgage assets due to the “credit crisis.”  Each company is responsible for writing their assets down to fair market value each quarter.  This is difficult in many circumstances since the mortgage holders have bundled these “risky assets” into large and complicated bundles involving complicated derivatives, mortgages of many types and terms, mortgages in differing geographic locations, etc. 

Merrill Lynch recently sold a package of “risky mortgage assets” for 22 cents on the dollar.  Rival Citigroup currently has their “risky mortgage assets” listed on their books for 53 cents on the dollar.   

With this “clarification” the SEC is basically allowing those holding assets that cannot be easily sold (Currently this includes “risky mortgage assets”) to value the assets at other then the “fire sale” price.  Their argument is that the “fire sale” price is not indicative of the actual fair value of the assets.

Mike Sylvester, CPA/ABV “accredited in business valuation”

Our firm provides a wide array of bookkeeping services.  My partner and I both have clients that we visit weekly, monthly, and quarterly.  We also have clients who bring their bookkeeping to us in our office; obviously most of the clients who bring their bookkeeping to us live near Fort Wayne, Indiana.  We have other clients who mail their bookkeeping to us or provide us access to their information electronically. 

In our area some of the banks are “calling” some of their loans.  When a bank “calls” a loan the borrower must pay the balance of the loan back to the bank within a specified time period, often 30 days.

I have a client who had his loans “called.”  He had been a loyal customer for many years and made his payments to the bank as required; however, his business is in an industry that his bank considered “high risk.”

The client had 30 days to pay back the entire loan balance.  To pay back the loan balance he had to take out another loan with a different bank.  In order to take out the new loan the new bank wanted his current financial statements.  This required a lot of bookkeeping to be done in a very short time…

All businesses should have their bookkeeping done periodically!

Mike Sylvester, CPA/ABV

Depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, depletion or other such factors.  When you purchase an asset for your business and place it in service you are allowed to write off a portion of the purchase price each year as depreciation expense.

For example, business furniture is most often depreciated over seven years so if you purchase a $700 desk on January 1st of 2008 you may take $100 worth of depreciation in 2008 and then an additional $100 per year for the next six years.  At the end of seven years you have taken the value of the asset to zero in this example.

Depreciation is nothing more than an estimate that is made in accordance with various guidelines.

Various methods of accelerated depreciation are available to allow business owners to depreciate their assets earlier; accelerated depreciation rules are often put into place by our elected officials in order to “encourage” business owners to spend money on equipment which in turn increases spending.

Depreciation is an expense that will lower your companies net income.  The lower your net income the less you will pay in income taxes.  Depreciation is something that you and your accountant must consider carefully when analyzing your tax situation.  It is not always best to take accelerated depreciation!  

Mike Sylvester, CPA/ABV