• Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting
  • December 21, 2009
  • Law Firm: Ropes & Gray LLP - Boston Office
  • The SEC Staff recently issued a study in response to section 133 of the Emergency Economic Stabilization Act of 2008, which mandates a study on mark-to-market accounting standards as provided by the Financial Accounting Standards Board’s ("FASB") Statement of Financial Accounting Standards No. 157 ("SFAS No. 157"). SFAS No. 157, issued in 2006, provides a standardized definition of fair value. The SEC's study was conducted in response to claims by critics that fair value accounting standards caused or contributed to the economic crisis because the application of the rule's fair value standards in illiquid markets results in assets being valued below their true economic value.

    The SEC's study addresses the effects of fair value accounting standards on financial institutions' balance sheets; the impact of fair value accounting on the 2008 bank failures and the quality of financial information available to investors; the process used by FASB in developing accounting standards; the alternatives to fair value accounting standards and the advisability and feasibility of modifying fair value accounting standards. After considering the issues above, the Staff issued the following recommendations: (1) SFAS No. 157 should be improved because its current guidance does not determine when fair value should be applied and it provides only a common definition of fair value and a common framework for its application; (2) existing fair value and mark-to-market requirements should be maintained given that fair value and mark-to-market accounting has been in place for years and its removal would erode investor confidence in financial statements and that fair value and mark-to-market accounting do not appear to have caused bank failures; (3) additional measures should be taken to improve the application and practice related to existing fair value requirements through the use of best practices guidance for determining fair value in illiquid or inactive markets; (4) accounting for financial asset impairments should be readdressed because U.S. Generally Accepted Accounting Principles do not provide a uniform model for assessing impairments; (5) additional guidance to foster the use of sound judgment should be implemented; (6) accounting standards that meet investors' needs should continue to be established; (7) additional measures to address the operation of existing accounting standards should be adopted given that steps could be taken to enhance the FASB process; and (8) accounting for investments in financial assets should be simplified because it would be useful for investors to have clear disclosure of inputs and judgments made when preparing a fair value measurement.