SEC Report on Fair Value Accounting

The SEC has announced that it:

today delivered a report to Congress mandated by the Emergency Economic Stabilization Act of 2008 that recommends against the suspension of fair value accounting standards. Rather, 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.

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 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, including consideration of the need for guidance to assist companies and auditors in addressing:
    • How to determine when markets become inactive and whether a transaction or group of transactions are forced or distressed
    • How the impact of a change in credit risk on the value of an asset or liability should be estimated
    • When should observable market information be supplemented with and/or reliance placed on unobservable information in the form of management estimates
    • How to confirm that assumptions utilized are those that would be used by market participants and not just a specific entity
  • Enhancement of existing disclosure and presentation requirements related to the effect of fair value in the financial statements.
  • Educational efforts, including those to reinforce the need for management judgment in the determination of fair value estimates.
  • Examination by the FASB of the impact of liquidity in the measurement of fair value, including whether additional application and/or disclosure guidance is warranted.
  • Assessment by the FASB of whether the incorporation of credit risk in the measurement of liabilities provides useful information to investors, including whether sufficient transparency is provided currently in practice.

The full report is available on-line.

Whoosh! This will take a certain amount of work to understand!

Leave a Reply

You must be logged in to post a comment.