Another fair-value showdown is taking shape, this time over whether fair value should reach even further than it currently does into balance sheets. But don’t expect the shootout to begin anytime soon.

The Financial Accounting Standards Board met this week to pick away at its comprehensive plan to change the way financial instruments are recognized and measured in financial statements. Most notably, the board has said it wants to move toward requiring all financial assets and liabilities, except an entity’s own debt in some instances, to be measured and recognized at fair value. The International Accounting Standards Board is following a similar course.

The mere suggestion has sent financial institutions scurrying to protest. The American Bankers’ Association sent FASB an 18-page letter and white paper describing how the board should take the banking business into account as it writes accounting standards. The banking group is taken aback that FASB is even considering such an idea.

“During the current economic crisis, preparers of financial statements, external auditors, regulators, and others have agreed that ‘mark to market’ accounting (MTM) estimates have lacked a sufficient level of reliability,” wrote Donna Fisher, senior vice president for the ABA. “With this experience, it is surprising that IASB and FASB would both establish new accounting models that expand the use and prominence of MTM rather than either reduce it or at least maintain the current level.”

Before the board even launched into discussions this week, FASB Chairman Robert Herz reiterated that the board is in the early stages of the project. He expects the board to issue a proposal late this year or early next year with a final rule taking effect no earlier than 2011. “I want to make these points clear again because we’ve been getting some calls from people who actually believe today was going to be the final meeting before issuing an exposure draft,” he said. “We’ve got lots more meetings to occur … a lot more work to do.”

The board tentatively decided that the balance sheet should reflect not only financial instruments whose changes in fair value are recognized in other comprehensive income, but also those that are reflected in net income. Nothing would prohibit an entity from reflecting amortized or historical cost if it chose to present that information as well. Where an entity would elect to present its own debt at amortized cost, the income statement should reflect interest accruals and any realized gains or losses, FASB has determined.

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