The Securities and Exchange Commission has released its eagerly anticipated report on mark-to-market accounting calling for improvements in fair value accounting standards, but not suspension of them.
Congress mandated the report as part of the Emergency Economic Stabilization Act. The 211-page report by 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.
"The study is the culmination of several months of extensive analysis, public roundtables and consultations with investor groups, accounting firms, banks, insurance companies, think tanks and academics," said SEC Chairman Christopher Cox (pictured) in a statement.
The report notes that investors generally believe fair value accounting increases financial reporting transparency and facilitates better investment decision-making. It also indicates that fair value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008. Rather, the report indicated 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.
While the report does not recommend suspending existing fair value standards, it makes eight recommendations to improve their application, including development of additional guidance and other tools for determining fair value when relevant market information is not available in illiquid or inactive markets.
“I am pleased to see that the SEC staff has concluded that a suspension of fair value or 'mark-to-market' accounting is inadvisable,” said Center for Audit Quality executive director Cindy Fornelli in a statement. She added that any changes should be proposed and dealt with through the independent standard-setting process.
The report recommends that the Financial Accounting Standards Board reassess the current impairment accounting models for financial instruments, including consideration of narrowing the number of models under U.S. generally accepted accounting principles. The report finds that under existing accounting requirements, information about impairments is calculated, recognized and reported on basis that often differs by asset type.
The report recommends improvements, including: reducing the number of models utilized for determining and reporting impairments, considering whether the utility of information available to investors would be improved by providing additional information about whether current declines in value are consistent with management expectations of the underlying credit quality, and reconsidering current restrictions on the ability to record increases in value (when market prices recover).
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