The SEC has disappointed those who want to significantly modify fair value accounting standards and to thus reduce the current stress on financial institution balance sheets. On December 30, 2008, the SEC delivered a Congressionally-mandated report of the staff of its Office of the Chief Accountant and Division of Corporation Finance concerning fair value accounting standards.
The report’s conclusions include:
- There should be no suspension of the existing accounting standards that prescribe (i) when assets and liabilities should be valued on a “fair value” basis and (ii) when changes in the fair values should be “marked to market” (i.e., reflected in a company’s income statement). The staff concluded that any such suspension would erode investor confidence in financial statements.
- Nor should SFAS 157 be suspended. SFAS 157 is the accounting statement that prescribes how to value assets and liabilities when the “fair value” method is being used. The staff concluded that suspension of SFAS 157 would lead to undesirable inconsistencies in determining fair values.
- Measures should be implemented to improve companies’ application of the fair value standards in SFAS 157. Although the report identifies numerous general types of measures that should be implemented or considered, the report generally does not recommend specific measures.
- The accounting standards for financial instruments, including particularly for impairment of such instruments, should be simplified and otherwise improved. Again, specific recommendations are largely lacking.
- U.S. generally-accepted accounting principles (GAAP), including the standards applicable to fair value accounting, should continue to be designed to meet primarily the needs of investors for information about their investments. The staff believes that such informational needs of investors should take precedence over, for example, (a) any needs of regulators who may also seek to use a company’s financial statements or (b) any concerns that a given accounting treatment might tend to increase the volatility of reported earnings.