Last week, the SEC announced the details of a congressionally mandated study of mark-to-market accounting. As announced by Chairman Cox, the SEC study will be headed by James Kroeker, Deputy Chief Accountant for Accounting at the SEC.
The study will focus on six areas:
- The effects of mark-to-market accounting 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.
- Alternative accounting standards to those provided in FASB Statement Number 157.
The study is required to be completed by January 2, 2009, as mandated by Sec. 133 of the Emergency Economic Stabilization Act of 2008 (EESA).
In 2006, the Financial Accounting and Standards Board released its Statement 157, which established a single definition and framework for the valuation of assets. The idea was to require the valuation to be based on what the asset would be valued on the open market.
However, mark-to-market accounting rules have come under some fire recently for their shortcomings in valuing assets for which there is no market. Some, such as Stephen A. Schwarzman, co-founder of Blackstone Group, have argued that this accounting practice has a great deal to do with the current market crisis. The concern is that, as market pessimism has reduced the liquidity of markets for certain assets, fair value accounting rules have required that asset valuations become severely understated. These write-downs, it is argued, unnecessarily throw the future of financial firms into doubt and erode investor confidence.
In response, two weeks ago the SEC issued guidance to clarify the standards for the valuation of assets for which market is illiquid. On Friday, the FASB followed suit, providing much more extensive assistance with respect to the valuation of troubled assets.
In addition to their mandate to study the effects of mark-to-market, the SEC was also granted authority to suspend the applicability of FASB 157 to any issuer or class of securities. To date, however, the SEC has not invoked this power under the EESA.