31 December 2008

SEC study on Fair Value Accounting Standards

The report 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.

The SEC delivered a report to Congress mandated by the Emergency Economic Stabilization Act of 2008 that recommends against the suspension of fair value accounting standards. The report 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 report makes eight recommendations, including:

Ø       Development of additional guidance and other tools for determining fair value when relevant market information is not available in addressing:

o        How to determine when markets become inactive and whether a transaction or group of transactions are forced or distressed

o        How the impact of a change in credit risk on the value of an asset or liability should be estimated

o        When should observable market information be supplemented with and/or reliance placed on unobservable information in the form of management estimates

o        How to confirm that assumptions utilized are those that would be used by market participants and not just a specific entity

 

Ø       Enhancement of existing disclosure and presentation requirements related to the effect of fair value in the financial statements.

Ø       Educational efforts, including those to reinforce the need for management judgment in the determination of fair value estimates.

Ø       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.

Ø       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 report also recommends that FASB reassess current impairment accounting models for financial instruments, including consideration of narrowing the number of models under U.S. GAAP. 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:

Ø       reducing the number of models utilized for determining and reporting impairments,

Ø       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

Ø       reconsidering current restrictions on the ability to record increases in value.

 

 

Press release

 

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