On December 30, 2008, the Securities and Exchange Commission delivered a report to Congress mandated by the Emergency Economic Stabilization Act of 2008 (EESA) recommending improving fair value accounting standards rather than suspending them. The report, titled Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008 (EESA): Study on Mark-To-Market Accounting, by the SEC’s Office of the Chief Accountant and Division of Corporation Finance, recommends improvements to existing practice, including reconsidering the accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available.  

The EESA mandated that the SEC, the Board of Governors of the Federal Reserve System and the Secretary of the Treasury conduct a study on mark-to-market accounting standards as provided by Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No.157). Other accounting standards in various ways require what is more broadly known as “fair value” accounting, of which mark-to-market accounting is a subset. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP and requires expanded disclosures about fair value measurements.  

The report addresses the following six key issues:  

  • The effects of such accounting standards on a financial institution's balance shee
  • The impacts of such accounting on bank failures in 2008 (The report stated that fair value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008)
  • The impact of such standards on the quality of financial information available to investors
  • The process used by the FASB in developing accounting standards  
  • The advisability and feasibility of modifications to such standards  
  • Alternative accounting standards to those provided in SFAS No. 157  

The report outlined the following recommendations:  

  • SFAS No. 157 should be improved, not suspended.  
  • Existing fair value and mark-to-market requirements should not be suspended.  
  • While fair value standards should not be suspended, additional measures should be taken to improve the application and practice related to existing fair value requirements.
  • In determining how to address the above issues, the FASB should consider which issues could be resolved through a review of the objectives of SFAS No. 157 and which issues would be best addressed by the valuation community.
  • The accounting for financial asset impairments should be readdressed.
  • Implement further guidance to foster the use of sound judgment.
  • Accounting standards should continue to be established to meet the need of investors.
  • Additional formal measures to address the operation of existing accounting standards in practice should be established.
  • Address the need to simplify the accounting for investments in financial assets.  

The report also recommends that the FASB reassess current impairment accounting models for financial instruments, including consideration of narrowing the number of models under U.S. GAAP.