Wednesday, October 1, 2008

SEC, FASB Issue Fair Value Guidance, More To Come

Late yesterday, the SEC and FASB issued guidance on use of fair value accounting in inactive markets. See SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting. Concurrently, FASB announced it has added a new item to the agenda for its board meeting today to discuss issuing additional guidance in the form of a Proposed FASB Staff Position (FSP) relating to FASB Statement No. 157, Fair Value Measurement (FAS 157). Although the official decision as to issuing the proposed FSP will be made at this morning’s FASB board meeting, some advance info is available in FASB’s board handout, which references the guidance issued jointly by SEC and FASB yesterday, and states the Proposed FSP would provide additional guidance through an example. According to the board handout, the FASB staff intends to propose to the board this morning that the proposed FSP be issued for a one week comment period, ending Oct. 9. This unusually short comment period would be to provide timely guidance for companies to apply to their fourth quarter financial statements (for the quarter ending Sept. 30). The SEC-FASB press release issued on Sept. 30 was to formalize guidance in time for quarter-end.

In related developments, some news reports say that relief or even a suspension of mark-to-market accounting will be incorporated into the draft amendment to be voted on by the Senate today to incorporate the economic ‘rescue’ bill into an existing bill that was already passed by the Senate. A vote by Congress would then follow. (Members of Congress are emphasizing the bill will promote a ‘rescue’ of the economy, vs. a ‘bailout’ since some constituents reportedly railed against funding a ‘bailout’, which some attribute to the failure of the bill to pass the House on Monday.) Other news reports said that a letter was sent to the SEC by over 60 members of Congress yesterday (Sept. 30), asking the SEC to act on mark-to-market accounting. Whether the SEC-FASB announcement yesterday is viewed as going far enough by those who believe fair value (mark-to-market) accounting had a procyclical effect in contributing to a downward spiral in the credit markets, will probably be something that Members of Congress consider in deciding whether to incorporate further accounting provisions into their bill.

Presidential candidate Senator John McCain issued a statement supporting the SEC’s action yesterday. (We did not see a statement issued by Senator Barack Obama but we will update this post if we find one.)

In our post last week entitled We Didn’t Start the Fire (Sale) we provided links to letters sent to the SEC by the American Bankers Association and the Financial Services Roundtable requesting immediate further guidance from the SEC on fair value. The SEC-FASB action yesterday appears to be at least partially in response to such requests. We also provided in that post a link to a letter sent to the SEC by the CFA Institute, an association of analysts, viewed by some as representative of the ‘investor’ view, which supported FAS 157 and opposed the kind of action ABA and FSR were asking of the SEC. One thing of note is that not all ‘investors’ have a monolithic view; one well known CFA with a different view than the CFA Institute is Vinny Catalano, former president of the New York Society of Security Analysts, who has frequently written about the need to provide further guidance on FAS 157, since ‘market values’ may work in efficient markets, but the current market is not really ‘efficient’. We will update this post to add some more links to related material later this week.

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