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Wells Fargo Gorges on Mark-to-Make-Believe Gains
By Jonathan Weil
Aug. 22 (Bloomberg) -- There's the kind of earnings investors can take to the bank. And then there's the kind the bank can show to investors.
Word to Wells Fargo & Co. investors: Beware the second kind.
Last quarter Wells Fargo reported record net income of $2.28 billion, up 9 percent from a year earlier. Read the footnotes to its latest quarterly report, though, and you will see a new term in accounting lingo called ``Level 3'' gains. Without these, the financial-services company's earnings would have declined.
So what are Level 3 gains? Pretty much whatever companies want them to be.
You can thank the Financial Accounting Standards Board for this. The board last September approved a new, three-level hierarchy for measuring ``fair values'' of assets and liabilities, under a pronouncement called FASB Statement No. 157, which Wells Fargo adopted in January.
Level 1 means the values come from quoted prices in active markets. The balance-sheet changes then pass through the income statement each quarter as gains or losses. Call this mark-to- market.
Level 2 values are measured using ``observable inputs,'' such as recent transaction prices for similar items, where market quotes aren't available. Call this mark-to-model.
Then there's Level 3. Under Statement 157, this means fair value is measured using ``unobservable inputs.'' While companies can't actually see the changes in the fair values of their assets and liabilities, they're allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make-believe.
etc
http://www.bloomberg.com/apps/news?p...d=aY8m0nta94GA
By Jonathan Weil
Aug. 22 (Bloomberg) -- There's the kind of earnings investors can take to the bank. And then there's the kind the bank can show to investors.
Word to Wells Fargo & Co. investors: Beware the second kind.
Last quarter Wells Fargo reported record net income of $2.28 billion, up 9 percent from a year earlier. Read the footnotes to its latest quarterly report, though, and you will see a new term in accounting lingo called ``Level 3'' gains. Without these, the financial-services company's earnings would have declined.
So what are Level 3 gains? Pretty much whatever companies want them to be.
You can thank the Financial Accounting Standards Board for this. The board last September approved a new, three-level hierarchy for measuring ``fair values'' of assets and liabilities, under a pronouncement called FASB Statement No. 157, which Wells Fargo adopted in January.
Level 1 means the values come from quoted prices in active markets. The balance-sheet changes then pass through the income statement each quarter as gains or losses. Call this mark-to- market.
Level 2 values are measured using ``observable inputs,'' such as recent transaction prices for similar items, where market quotes aren't available. Call this mark-to-model.
Then there's Level 3. Under Statement 157, this means fair value is measured using ``unobservable inputs.'' While companies can't actually see the changes in the fair values of their assets and liabilities, they're allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make-believe.
etc
http://www.bloomberg.com/apps/news?p...d=aY8m0nta94GA
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