SEC Rejects Move To Suspend Mark-To-Market Accounting
In the wake of more $1 trillion in write-downs and losses at financial institutions in 2008, mark-to-market, or fair-value, accounting has become a hotbed for controversy. Critics of the accounting standard, which banks use to determine the market value of their assets, say it is unfair that they are required to use the rule when reporting hard-to-value assets such as mortgage-backed securities. Proponents say changes to mark-to-market accounting puts investors at risk and allows banks to resort to “mark-to-make-believe” accounting.
A recent study by the U.S. Securities and Exchange Commission is weighing on the side of investors, and says mark-to-market accounting should be maintained. The 259-page report does, however, provide several recommendations to improve transparency, including the development of additional guidance from regulators for determining the fair value of investments in inactive markets. Currently in an illiquid market, an asset’s value is based on an estimate provided by management and/or computer models.
In October, following the government’s approval of a $700-billion bailout package for U.S. financial institutions, Congress instructed the SEC to examine the impact of fair-value accounting on 2008 bank failures and the many financial problems affecting Wall Street.
Apparently, the accounting rule was not a major factor in creating either issue. Instead, the report attributed the collapse of 25 banks in 2008 to be the result of “growing probable credit losses, concerns about asset quality, and, in certain cases, eroding lender and investor confidence.”
A summary of the SEC’s report can be found at http://www.sec.gov/news/press/2008/2008-307.htm
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