The US markets watchdog has given a tacit seal of approval to fair value accounting rules, but also urged standard setters to tighten up on the way impairments are calculated.

The Securities and Exchange Commission completed an in-depth probe into the controversial framework after being tasked with the job as a key part of the Emergency Economic Stabilization Act of 2008, the piece of legislation by which $700bn is to be pumped into the US economy.

The SEC said: '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 US appeared to be the result of growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence.

However, the SEC said that FASB should look at reassessing current impairment accounting models for financial instruments, 'including consideration of narrowing the number of models under US 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: reducing the number of models utilized for determining and reporting impairments, 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 reconsidering current restrictions on the ability to record increases in value (when market prices recover).'

The 211-page report investigated the effects of fair value on a financial institution’s balance sheet; the impacts of such accounting on bank failures in 2008; the impact of such standards on the quality of financial information available to investors;the process used by the Financial Accounting Standards Board in developing accounting standards; the advisability and feasibility of modifications to such standards; and
alternative accounting standards to those provided in such FAS 157, the fair value standard.

The SEC's endorsement will be seen as a fillip for US standard setters. In Europe, the IASB had no choice but to allow a reclassification of certain assets under the fair value rules in order to avoid a much larger carve-out by the European Commission.

Further reading:

Tweedie nearly quit after fair value change