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SEC keeps fair value faith

US watchdog urges standard setters to tighten up the way impairments are calculated, despite approving fair value accounting rules

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.

As part of the
Emergency
Economic Stabilization Act of 2008
­ the legislation which aims to pump
$700bn into the US economy ­ the
Securities and Exchange
Commission
has reviewed the controversial accounting rule, which requires
companies to price assets such as derivatives according to their current market
values.

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 [of the SEC
review of fair value accounting] 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 the
Financial Accounting Standards
Board
should look at reassessing current impairment accounting models for
financial instruments ‘including consideration of narrowing the number of models
under US GAAP.’

Under current accounting requirements, information about impairments is
calculated, recognised and reported on a basis that often differs by asset type,
the SEC review added.

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