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Loosening of ?Mark-to-Market? Accounting Rules DebatedSubmitted by: Subodh Mishra, Governance Institute

Sections 132 and 133 of the Senate bailout bill approved last night would authorize the Securities and Exchange Commission to suspend and to study alternatives to ?mark-to-market? or ?fair value? accounting. The method of accounting--known formally as SFAS 157--effectively values an asset at its current, rather than purchase, price.

Critics of the practice blame valuations made under the decades-old rule for fueling the credit crisis by forcing financial institutions to value their assets at ?fire-sale? prices. The SEC and the Financial Accounting Standards Board took steps on Sept. 30 to ?clarify? the rules to give companies a greater say in how they value certain assets. The move was welcomed by banking interests that have also pushed for a loosening of mark-to-market accounting rules in the bailout legislation.

?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,? American Bankers Association head Edward L. Yingling noted in a Sept. 30 statement. ?This guidance will help auditors more accurately price assets that are difficult to value under current market conditions ? [and better their] understanding of the accounting literature as they prepare third quarter reports,?

Advocates for investors and auditors oppose the change, arguing that any watering down of SFAS 157 would result in illusory accounts. The Center for Audit Quality, the Council of Institutional Investors, and the CFA Institute--which represents the nation?s public company auditors, institutional investors and chartered financial analysts--said they oppose any suspension of SFAS 157.

?Suspending fair value accounting during these challenging economic times would deprive investors of critical financial information when it is needed most,? the groups said in a joint statement on Oct. 1. ?Investors have a right to know the current value of an investment, even if the investment is falling short of past or future expectations.?

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on October 02, 2008 (boomark / email).