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.
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