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Mark-To-Market Guidance Issued

SEC, FASB issue FASB 157 guidance

September 30, 2008

By MortgageDaily.com staff


Guidance issued today on mark-to-market accounting was cheered by bankers.

The Securities and Exchange commission today issued guidance on mark-to-market accounting. The guidance on FASB Statement No. 157, Fair Value Measurements, was prepared in consultation with the Financial Accounting Standards Board.

A letter from the Consumer Mortgage Coalition yesterday called for the regulator to suspend the mark-to-market rule, noting that it drove the current crisis, is ineffective when no market prices exist and benefits short sellers and vulture funds.

"The rule has incorrectly led to massive write-offs by the commercial banking and investment banking system which affected the balance sheets of institutions and thus their capital ratios," the CMC stated. "Impacted institutions were then forced to either raise more capital or cut back in lending, further exacerbating the credit crisis. If capital could not be raised, the viability of the institutions was in question."

More than 60 congressmen from both major parties signed a letter to the SEC calling for a suspension of mark-to-market rules.

"Mark to Market rules, while well intended, have exacerbated the current economic downturn by hamstringing the ability of banks to make loans to consumers and businesses," a statement accompanying the letter said. "Chairman Cox should act today to begin the process of suspending Mark to Market and replacing those rules with a mark to value mechanism."

The SEC indicated in its guidance that management's internal assumptions can be used in determining fair value when an active market for a security does not exist. But expectations of future cash flows and appropriate risk premiums must be included.

Broker quotes should reflect market information from actual transactions in a liquid market, while models with inputs based on the information available only to the broker may be relied upon in less active markets.

Distressed or forced liquidation sales are not determinative when measuring fair value. Transactions in inactive markets should be considered in management's estimate of fair value, though adjustments may be necessary to arrive at fair value. Widening spreads between asking and bidding prices as well as a lack of bidders should be considered.

In determining whether an impairment is other-than-temporary, the amount of time and the extent to which the market has been less than cost should be factored in. Also, the financial condition and near-term prospects of the issuer and the whether the intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value should also be considered.

"Because fair value measurements and the assessment of impairment may require significant judgments, clear and transparent disclosures are critical to providing investors with an understanding of the judgments made by management," the SEC said.

The American Bankers Association issued a statement commending the SEC for clarifying SFAS 157, noting the guidance will help auditors more accurately price assets that are difficult to value under current market conditions and give preparers and auditors a better understanding of the accounting literature as they prepare third-quarter reports.

"More and more of our members in recent weeks have raised concerns that a number of accounting firms were mistakenly interpreting SFAS 157 in a way that required marking assets to fire sale values," ABA said. "We expressed the urgency of the situation in a letter to the SEC on Tuesday of last week, which was followed by a productive meeting on Thursday with representatives of the SEC, PCAOB, FASB, and eight major accounting firms."

CMC also called on the SEC to defer implementation of the new merger accounting rules for at least five years because they are creating uncertainty for high quality companies which might potentially purchase weaker companies.

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