No fair value suspension in the US, SEC urges

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:

nearly quit after fair value change

Related reading

Fiona Westwood of Smith and Williamson.