The Senate voted to reaffirm the Securities and Exchange Commission's authority to suspend mark-to-market accounting as part of its approval of the financial rescue plan, as fair value measurement comes under fire from banking groups.
On Tuesday, the SEC's Office of the Chief Accountant and the Financial Accounting Standards Board provided some clarifications on FASB Statement 157 on fair value measurements. They said that management's internal assumptions about expected cash flows could be used to measure fair value when there is no other relevant market evidence.
"When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable," they said. "Statement 157 discusses a range of information and valuation techniques that a reasonable preparer might use to estimate fair value when relevant market data may be unavailable, which may be the case during this period of market uncertainty."
The SEC and FASB also said that broker quotes may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security. "In a liquid market, a broker quote should reflect market information from actual transactions," they wrote. "However, when markets are less active, brokers may rely more on models with inputs based on the information available only to the broker."
The American Bankers Association praised the SEC for clarifying the accounting rules for measuring fair value. "This guidance will help auditors more accurately price assets that are difficult to value under current market conditions," said ABA president Edward Yingling in a statement. "The SEC's action will give preparers and auditors of financial statements a better understanding of the accounting literature as they prepare third-quarter reports." He added that his group met with representatives from the SEC, FASB, the Public Company Accounting Oversight Board and eight major accounting firms after he sent an urgent letter to the SEC last week.
However, FASB's parent organization, the Financial Accounting Foundation, is protesting political interference with fair value accounting standards.
"We care deeply about the integrity and independence of the standards-setting process," wrote FAF Chairman Robert Denham (pictured) in a letter to Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. "We are very concerned about the current efforts of some to legislate the suspension of one of the FASB's standards, Statement 157 on fair value measurements. We believe that any legislative effort to overturn a FASB standard will greatly undermine investor confidence. We believe that once Congress starts setting accounting standards through its political process, the integrity of U.S. accounting standard-setting and the credibility of U.S. financial reporting will be dangerously compromised."
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