SEC Study On Mark-To-The Market Accounting

The SEC outlined its proposed study on mark-to-the market accounting under FAS 157 on Friday, soliciting public comments and announcing that public round tables will be held. As previously discussed here, Section 133 of the Emergency Economic Stabilization Act of 2008 requires the SEC, in consultation with the Board of Governors of the Federal Reserve System and the Secretary of the Treasury to conduct a study regarding FAS 157 and report its findings to congress within ninety days. Under the Act, and according to the SEC’s Release, the study will focus on six points:

1) The effects of mark-to-the market accounting on the balance sheets of financial institutions;

2) The impact of FAS 157 on bank failures this year;

3) The impact of the standard on the quality of financial information available to investors;

4) The process used by the FASB in developing the standard;

5) The advisability and feasibility of modifying the standards; and

6) Alternative standards.

Deputy Chief Accountant James Kroeker will lead the Commission’s efforts.

Of immediate interest will be how the Commission administers its exceptive authority under Section132 of the EESA. That Section gives the SEC authority to exempt individual issuers from FAS 157. Some proponents of FAS 157 argue that since most loans are performing an alternative to suspension is to value the securities based on projected cash-flow rather than market value since there is no real market.

Others however claim that suspending the rule would only delay resolving questions about the assets. Proponents of this approach also argue that users of the financial statements and investors have a right to know the value of the securities.

Suspension of FAS 157 on an issuer by issuer basis could also raise questions about the comparability of financial statements among issuers even within a given industry. At the same time however, the SEC’s authority would only extend to its registrants. Banks would presumably be subject to the rules and regulations of their primary regulators.