I don't think she knows yet.
Posted on 09/30/2008 3:38:37 PM PDT by sanchmo
Washington, D.C., Sept. 30, 2008 — The current environment has made questions surrounding the determination of fair value particularly challenging for preparers, auditors, and users of financial information. The SEC's Office of the Chief Accountant and the staff of the FASB have been engaged in extensive consultations with participants in the capital markets, including investors, preparers, and auditors, on the application of fair value measurements in the current market environment.
There are a number of practice issues where there is a need for immediate additional guidance. The SEC's Office of the Chief Accountant recognizes and supports the productive efforts of the FASB and the IASB on these issues, including the IASB Expert Advisory Panel's Sept. 16, 2008 draft document, the work of the FASB's Valuation Resource Group, and the IASB's upcoming meeting on the credit crisis. To provide additional guidance on these and other issues surrounding fair value measurements, the FASB is preparing to propose additional interpretative guidance on fair value measurement under U.S. GAAP later this week.
While the FASB is preparing to provide additional interpretative guidance, SEC staff and FASB staff are seeking to assist preparers and auditors by providing immediate clarifications. The clarifications SEC staff and FASB staff are jointly providing today, based on the fair value measurement guidance in FASB Statement No. 157, Fair Value Measurements (Statement 157), are intended to help preparers, auditors, and investors address fair value measurement questions that have been cited as most urgent in the current environment.
* * *
Yes. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable. Statement 157 discusses a range of information and valuation techniques that a reasonable preparer might use to estimate fair value when relevant market data may be unavailable, which may be the case during this period of market uncertainty. This can, in appropriate circumstances, include expected cash flows from an asset. Further, in some cases using unobservable inputs (level 3) might be more appropriate than using observable inputs (level 2); for example, when significant adjustments are required to available observable inputs it may be appropriate to utilize an estimate based primarily on unobservable inputs. The determination of fair value often requires significant judgment. In some cases, multiple inputs from different sources may collectively provide the best evidence of fair value. In these cases expected cash flows would be considered alongside other relevant information. The weighting of the inputs in the fair value estimate will depend on the extent to which they provide information about the value of an asset or liability and are relevant in developing a reasonable estimate.
Broker quotes may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security. In a liquid market, a broker quote should reflect market information from actual transactions. However, when markets are less active, brokers may rely more on models with inputs based on the information available only to the broker. In weighing a broker quote as an input to fair value, an entity should place less reliance on quotes that do not reflect the result of market transactions. Further, the nature of the quote (e.g. whether the quote is an indicative price or a binding offer) should be considered when weighing the available evidence.
The results of disorderly transactions are not determinative when measuring fair value. The concept of a fair value measurement assumes an orderly transaction between market participants. An orderly transaction is one that involves market participants that are willing to transact and allows for adequate exposure to the market. Distressed or forced liquidation sales are not orderly transactions, and thus the fact that a transaction is distressed or forced should be considered when weighing the available evidence. Determining whether a particular transaction is forced or disorderly requires judgment.
Yes. A quoted market price in an active market for the identical asset is most representative of fair value and thus is required to be used (generally without adjustment). Transactions in inactive markets may be inputs when measuring fair value, but would likely not be determinative. If they are orderly, transactions should be considered in management's estimate of fair value. However, if prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value.
A significant increase in the spread between the amount sellers are "asking" and the price that buyers are "bidding," or the presence of a relatively small number of "bidding" parties, are indicators that should be considered in determining whether a market is inactive. The determination of whether a market is active or not requires judgment.
In general, the greater the decline in value, the greater the period of time until anticipated recovery, and the longer the period of time that a decline has existed, the greater the level of evidence necessary to reach a conclusion that an other-than-temporary decline has not occurred.
Determining whether impairment is other-than-temporary is a matter that often requires the exercise of reasonable judgment based upon the specific facts and circumstances of each investment. This includes an assessment of the nature of the underlying investment (for example, whether the security is debt, equity or a hybrid) which may have an impact on a holder's ability to assess the probability of recovery.
Existing U.S. GAAP does not provide "bright lines" or "safe harbors" in making a judgment about other-than-temporary impairments. However, "rules of thumb" that consider the nature of the underlying investment can be useful tools for management and auditors in identifying securities that warrant a higher level of evaluation.
To assist in making this judgment, SAB Topic 5M1 provides a number of factors that should be considered. These factors are not all inclusive of the potential factors that may be considered individually, or in combination with other factors, when considering whether an other-than-temporary impairment exists. Factors to consider include the following:
The length of the time and the extent to which the market value has been less than cost;
The financial condition and near-term prospects of the issuer, including any specific events, which may influence the operations of the issuer such as changes in technology that impair the earnings potential of the investment or the discontinuation of a segment of the business that may affect the future earnings potential; or
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.
All available information should be considered in estimating the anticipated recovery period.
* * *
Finally, 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. In addition to the disclosures required under existing U.S. GAAP, including Statement 157, the SEC's Division of Corporation Finance recently issued letters in March and September that are available on the SEC's Web site to provide real-time guidance for issuers to consider in enhancing the transparency of fair value measurements to investors. Additionally, the SEC staff and the FASB staff will continue to consult with capital market participants on issues encountered in the application of fair value measurements.
# # #
1 AU 332, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities, of the PCAOB Interim Auditing Standards also provide factors to consider when evaluating whether an impairment is other-than-temporary.
WashPoststates that "Today's SEC rules clarifications do not end mark-to-market accounting. But they do let the holders of these low-value "toxic assets" to use other ways to value them, which probably will lead to an increase in their value".
However, Dealscape warns that "The catch, for banks who have been clamoring for easing of the mark-to-market rules that have been hammering the value of their mortgage-related assets, is that using the cash flow valuations requires them to set aside more capital to cover the risk of losses".
Sounds like it, anyway to find out what this really means??
Good news for once. They didn’t get their blank check so they actually have to be more creative than just spending tax payer money. Such a novel idea for these financial geniuses. We have a government full of Harvard lawyers and see what we get? Tell people who can’t get loans to send their kids to the big schools to send them to community colleges they might actually learn something about the real world. We can not spend our way out of this problem.
Statement by McCain-Palin senior policy adviser Doug Holtz-Eakin on the SEC’s plan to relax mark-to-market accounting requirements: [Rich Lowry]
Here it is:
“John McCain is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists. There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets. In March, John McCain called for a meeting of accounting professionals to discuss whether mark-to-market accounting was magnifying problems in the financial markets.”
Bush should ask for Paulson’s resignation, and then resign himself.
There has been no need for their fear mongering demands for immediate unprecedented money and powers from congress.
This is a manufactured crisis.
Bush, Paulson, Cox, and Bernanke have had the power to do what’s needed all along. They didn’t need to go to Congress or create panic in the markets.
This was Newts suggestion! If so true this is INCREDIBLE!
I don't think she knows yet.
Figures don't lie, but liars figure.
The toxic waste on the banks' balance sheet is still inherently worth zero.
. . . . .
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Newt was talking about this on Greta yesterday!
Then there was the FDIC raising the amount of cash protection—something McCain talked about.
Good going for Republican ideas — now if public can hear about it!
Newt was talking about this on Greta yesterday!
Then there was the FDIC raising the amount of cash protection—something McCain talked about.
Good going for Republican ideas — now if public can hear about it!
This is McCain’s opportunity.
He called for Cox to be fired and was criticized for it.
But I think he was right, actually.
And he can take it further.
He needs to come out and accuse the Bush administration of fear mongering, declare the bailout as a scam and the crisis as manufactured.
It would instantly make him a hero and end this election.
Might be a good idea for the SEC to work with some smart guys (instead of wiseguys) to build a "model" to estimate when the housing glut is going to disappear. That'd give a target date for beginning the process of figring out if these securities have value.
Auditors Resist Effort
To Change Mark-to-Market
http://online.wsj.com/article/SB122280147924091325.html
Why do you say that, isn't there a house at the end of the mortgage that is not worth zero. The toxic waste is the mortgage, the value is still in the house. Yes? No?
Is it really suspended ??
This is McCain’s opportunity.
He called for Cox to be fired and was criticized for it.
But I think he was right, actually.
And he can take it further.
He needs to come out and accuse the Bush administration of fear mongering, declare the bailout a scam and the crisis as manufactured.
It would instantly make him a hero and end this election.
No doubt the markets will welcome this, for awhile anyway.
You have to wonder how they'll paper over the Credit Cards, Auto Loans, Student Loans, State/Local defaults, etc. that I see looming as the result of the slowdown we are already in but, thanks to Gov’t stats, up to now has been reasonably well concealed.
Great news. I hope.
The RSC, Newt Gingrich and others have been calling for the SEC to make this move, ASAP? ... NOW!
It looks like the key financial aspects of the Newt / Republican plan is being implemented without massive panic or fanfare:
This “clarification” eliminates mark-to-market in two cases:
* If there is no market to which to mark (like right now)
* If the market is created because of firesales (like right now)
FDIC increases coverage to $250k per depositor.
Now if FDIC’s authority is expanded to include different types of “deposits” and “depositors” and “banks” we essentially have the plan in effect (minus the tax changes).
It will be interesting to see how the credit markets and equity markets react tomorrow.
Sure, that is true in a stagnant sense — But restore the IRS deduction for rentals, what caused the first RTC to be installed. The stinker of the law was the Tax Reform Act (TRA) of 1986.
Then watch the market for these empty houses take off.
I thought M2M was to be determined on a 3 year rolling avg.
Now all we need is to dump Sarbanes Oxley, and it’s rules for idiots, and free the IPO market from England.
If only we could get through a energy bill with real energy in it.
I'm not talking about individual mortgage loans; I'm referring to mortgage-backed securities, which are backed by the cash flow generated by payments on a pool of pieces of different mortgages (some of which may be subprime). Call it the mixing of bad with the good: it poisons the whole bunch.
As for value, an asset is worth what the market will pay for it. In Northern Virginia, single-family homes went for $750K and up just three years ago; today, you'd be laughed at for trying to sell at that price.
We need to abolish the SEC and these other government agencies to stop them from continuing to pursue their mischief.
Newt plan? pppfffttt...Not so fast. Newt has once again shown his true colors. He’s now on board with The Plan. Neil Cavuto had him on tonight- Newt tried to defend his change of mind- weakly. Neil was dumbfounded.
In other words, this year-end is going to be like Sarbanes-Oxley and Y2K rolled into one, with the audience waiting to jump all over the estimates. It's a great time to be a consultant. Now I just need to see who is going to pay the best rates.
Believe me, the major problem in this country is not the lack of credit. It’s too much credit put too many people into too much debt. There are plenty of home buyers if the price is right. But they don’t qualify for the “A” mortgage because of too much credit. And for the most part, that’s why sub-prime became a hit. They could get a sub-prime loan with high ratios.
Oh yeah, I forgot those funny money worthless pieces of paper. Well, sub-prime stinkers, that’s not going to be pretty. Who bought those, believers in the tooth fairy? Isn’t this where the criminal probe of Fannie and Freddie should be focused?
It’s not the mortgage that’s the problem it’s what wall street did with the stinkers that is the BIG problem.
I know about the inflated prices for houses, a direct cause of the failure of government to keep a lid on this crap in the first place.
But even today the houses are not without value. Someone would buy them at some price, glut or no glut.
Futures open now. S&P500 -5.4 within the last 10 minutes.
“Good news for once. They didn’t get their blank check so they actually have to be more creative than just spending tax payer money.”
WOW. Just wow. Didnt we see the exact same thing play out after the immigration bill fiasco? They started doing things they ‘couldnt do’ once they realized the dream they wanted was out of reach, and people said “why dont you do this instead”?
From the beginning I’ve been wondering why they dont suspend mark-to-market, and I was pleased to see the bailout bill included some language on it. Now SEC goes and does something they should have done IN MARCH.
Does this really lift the M2M rule? Can we establish that as fact?
bttt
I think McCain was the one pushing that train when it left the station, unfortunately.
The worst thing the government did was take accounting pronouncements from the private sector and made it a political football.
Financial reports will be worthless in 20 years.
A lot of these Banks & Wall Street had bad assets than leverage them 30 to 1
repeal the Community Reinvestment Act!
He called for Cox to be fired and was criticized for it.
But I think he was right, actually.
And he can take it further.
He needs to come out and accuse the Bush administration of fear mongering, declare the bailout as a scam and the crisis as manufactured.
It would instantly make him a hero and end this election.
Seems like a good idea...too bad there are so few readers at RNC HQ.
The problems started with the mortgages.
First, everyone believed that housing prices would increase indefinitely, leading to folks flipping mortgages like there was no tomorrow. That's partly the reason why the average price of a single-family home in the exurbs of Northern Virginia went into the half-a-million range.
Second, bankers did not adhere to the traditional rules of lending (the five C's) because they were simply packaging pieces of loans and selling them to investors. Why would you care if someone else was taking the risk, and you still got your fees and commissions?
Yes.
This is the answer to a key Balance Sheet question: What are these Collateralized Debt Obligations worth if they are not being traded today? Clearly they are worth something. A check is coming in the mail next month to pay the interest and some of the principal. With this ruling, Management can make some estimates of the value of that cash flow, and record the Net Present Value on their Balance Sheets. That means they don't have to take a 100% loss on the instrument just because nobody wants to buy it from them today (i.e. the market for that instrument froze).
This should help avoid a total meltdown of Balance Sheets and Income Statements across the Banking sector. The ruling leaves some opportunity for manipulation to the upside by management, but it will probably result in much more accurate (i.e. non-zero) valuations of instruments that are still generating cash.
Good move by the SEC.
So- according to the WaPo- they did NOT suspend mark to market.
~snip~
“Today’s SEC rules clarifications do not end mark-to-market accounting. But they do let the holders of these low-value “toxic assets” to use other ways to value them, which probably will lead to an increase in their value”.
~snip~
This sounds like something very different than what was requested by the GOP.
Well I guess the answer is yes
http://corner.nationalreview.com/post/?q=ZDM4Y2IwNmIzZTE3NDkyNjdmMzY3YWJlNjJmNDEzN2M=
Now if they dump Sarbanes-Oxley and go for a real energy bill, the moon is in sight.
No bailout needed.
As I read it and as they’re discussing it on CNBC, it doesn’t ‘lift’ M2M, it allows flexibility in accounting for these ‘bad’ loans. Anything more detailed is way above my pay grade.
The problem is that if buyers had been properly qualified folks should ahve been laughing at $750k three years ago.
Prices are not just subjective. Housing costs were very disproportionate to salaries in the region, and disproportionate to the cost of building the house with reasonable costs of labor and material. That should have sent warning signs flashing everywhere. But brokers, appraisers and banks ignored that.
Although USPS is particlarly sensitive to that problem (since it's mandated by law to deliver mail to everybody whether it's economical or not), the fact that they've had three such requests for rate increases for that reason in the 4.5 years since I retired is cause for concern.
This didn't used to happen!
Now we have a collapsing housing market because values cannot be sustained in the face of the glut. The best estimates out there suggest that dwelling units have, on the average, lost 20% of appraised value in the last couple of years.
The problem as I see it is that this is the first time any large nation-state has ever had what approaches a "full housing" status. There are no precedents to follow unless we dig back through time to see what happened in America as people discovered they could eat meat every day.
I don’t know what you call “use alternate accounting methods”.
It sounds suspended to me, it seems to be suspended according to McCain.
Why am I not surprised that the WaPost is trying to donw play it, because Conservatives were pushing for it. And McCain is in there as well pushing it seems.
Any idea how ‘popular’ it will be with companies to suspend m2m and the percentage of those that do it?
That depends entirely on whether actual cash flows are likely to continue.
For example, if on a big debt instrument you've received the following actual cash flows, would you sell it to me for $0?
Jan: $10.0M
Feb: $9.5M
Mar: $9.0M
Apr: $8.7M
May: $8.5M
Jun: $8.4M
Jul: $8.3M
Aug: $8.2M
Sep: $8.1M
If you're willing to sell me that instrument for $1.00, I'll take it. There may be no market for that instrument today, because nobody likes its name, its category, its city, its demographic, etc. But that does not mean it is literally worthless. It just means the market is too thin to measure the value since none have been traded recently.
If you disagree, let me know at what price you would sell the foregoing cash flow. If your answer is non-zero, then you are wrong.
The "clarification" doesn't end MTM, but it states that in the case "when an active market for a security does not exist" companies can use alternate methods for determining the "fair value of assets" - including "expected cash flows from an asset."
And Dave Ramsey's.
Well M2M is an accounting method, allowance to use a different accounting method says you don’t have to use the M2M method, so it appears gone.
If you parse McCain’s presser, he wants to convene an accounting group to see how much of the current problem was caused by the M2M rule — I read that he is trying to figure what might still be left to fix.
It looks suspended to me ... but anyone know for sure?
JMO, but all the SEC did was muddy the waters. Instead of offering a hard and fast ruling, they said there are alternative accounting principles already in place that can be used. In the current market climate, I’m not sure much will come of it. Another thing, banks also operate under an additional set of accounting rules that may conflict with the SEC’s interpretations. If the PTB wish to at least temporarily suspend mark to market accounting, now is not the time to parse their regulations. They will have to be set in stone for the time being for them to create any movement in the financial markets. Something tells me they’re not that interested — JMO of course.
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