The Securities and Exchange Commission (SEC) has come out in opposition of suspending fair value accounting standards, according to an SEC report delivered to Congress.
The SEC's Office of the Chief Accountant and Division of Corporation Finance recommends improvements to existing practice, including reconsidering the accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available.
Among key findings, the report notes that investors generally believe fair value accounting increases financial reporting transparency and facilitates better investment decision-making. The report also observes that fair value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008. Rather, the report indicates that bank failures in the U.S. appeared to be the result of growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence.
The Emergency Economic Stabilization Act of 2008 directed the SEC, in consultation with the Board of Governors of the Federal Reserve System and the Secretary of the Treasury, to study mark-to-market accounting standards as provided by the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 157, Fair Value Measurements. The act, which was signed into law on Oct. 3, 2008, required that the study be completed within 90 days.
While the report does not recommend suspending existing fair value standards, it does recommend the development of additional guidance and other tools for determining fair value when relevant market information is not available in illiquid or inactive markets. It also suggests enhancement of existing disclosure and presentation requirements related to the effect of fair value in the financial statements, as well as examination by the FASB of the impact of liquidity in the measurement of fair value.
The entire report can be viewed at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf.