SEC to ease mark-to-market rules

The US Securities and Exchange Commission offered another lifeline to struggling US banks yesterday, telling them it planned "further clarifications" on when mark-to-market accounting rules could be ignored.

The SEC said banks should remember that market prices need not be used "when an active market for a security does not exist", or when the only prices available were the result of distressed or forced sales, meaning that prices were "temporarily impaired".

The existence of wide bid/offer spreads, or the presence of only a small number of bidders, could also be used as evidence of a "disorderly market" whose prices could be ignored for accounting purposes. In those cases, banks could determine fair value for themselves based on their own internal assumptions of expected cash flow. More detailed guidance is due later on this week.

In April this year, the SEC released a letter to banks emphasising that the Statement of Financial Accounting Standard (SFAS) rules need not apply in the case of distressed or forced sales.

Yesterday's announcement followed lobbying from the American Bankers' Association (ABA), whose president, Edward Yingling, welcomed the news, in particular the timing, which would allow the laxer interpretation to be used for financial statements for the quarter ending on September 30.

"Since March the ABA has strongly made the case that repairs to SFAS 157 could be done within the standard itself," Yingling said. "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."

The issue was raised in April by the Financial Stability Forum, which told FASB's international counterpart, the International Accounting Standards Board (IASB), to start looking at methods of valuing instruments that are not actively traded. But the IASB has not so far echoed the SEC's enthusiasm for discarding mark-to-market pricing.

In a draft document released on September 16, IASB recognised the problem, but pointed out that estimates based on management estimates of future cash flows, as recommended by the SEC, would be flawed. "Such ‘fundamental values’ are not consistent with the fair value measurement objective because they ignore the spreads that market participants would require for bearing risk and for other factors, such as illiquidity," IASB wrote.

"Even when markets are inactive, a current transaction price for the same or a similar instrument normally provides the best evidence of fair value. Furthermore, forced transactions, involuntary liquidations and distressed sales are rare and evidence is needed before it is determined that a transaction has not taken place at fair value."

Consultation on the IASB proposal closes on Friday October 3.

See also: Rising above it?
A balancing act
The blame game
The ups and downs of fair value