Groups Claim Fair Value 'Judgment' Is Too Murky

Leaders of six business associations have written a joint letter to the Securities and Exchange Commission complaining that recent guidance about the use of judgment in fair value accounting "has the potential to cloud transparency."

In a letter to SEC Chairman Christopher Cox, leaders of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, the Financial Services Roundtable, the Property Casualty Insurers Association of America, the American Council of Life Insurers, the Mortgage Bankers Association and the American Insurance Association said they want the SEC to issue further guidance on the use of judgment in fair value accounting.

The SEC and the Financial Accounting Standards Board recently amended FAS 157, the standard for fair value measurements (see FASB Amends Fair Value Measurements). Fair value and mark-to-market accounting have come under fire for playing a role in the economic crisis by forcing banks to make huge writedowns on the value of assets that are difficult to price in illiquid markets. The SEC has begun a study of the effects of mark-to-market accounting mandated by the Emergency Economic Stabilization Act, which it plans to deliver by January 2 (see SEC Begins Mark-to-Market Study).

In its recently issued guidance, FASB said, "Determining fair value in a dislocated market depends on the facts and circumstances and may require the use of significant judgment about whether individual transactions are forced liquidations or distressed sales."

In a joint press release, the SEC's Office of the Chief Accountant and FASB also provided guidance about judgment. "Because fair value measurements and the assessment of impairment may require significant judgments, clear and transparent disclosures are critical to providing investors with an understanding of the judgments made by management," they said. 

The letter from the six industry associations urges the SEC and FASB to clarify the notion of "judgment."

"This dichotomy on judgment between the joint press release and the FASB guidance has the potential to cloud transparency at the very moment it is most needed," the association leaders said. "We do not believe that management, preparers, auditors and investors understand what is expected of them, or whether and how the needed judgments can be exercised. Let us state that we believe that judgment is needed to provide the fairest and most accurate disclosures possible in inactive markets. We are not asking that unrealistic data be used, rather that fair value, under these stressful conditions, be fair."