SEC report on fair value accounting
05 Jan 2009
The US Securities and Exchange Commission has submitted to the US Congress a 211-page report on 'fair value accounting' by financial institutions. The report, mandated by the Emergency Economic Stabilization Act of 2008, recommends against suspending fair value accounting standards.
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
Additionally, the report makes recommendations for improvements to the process used by the FASB in developing accounting standards, in particular, steps that could enhance the timeliness and transparency of the process.
Click for:
- Press Release (PDF 34k)
- SEC Report (PDF 972k)