By Rachelle Younglai
WASHINGTON, Dec 30 (Reuters) - There is no need to suspend a controversial accounting rule used to value hard-to-price assets such as the toxic debt underlying the U.S. housing crisis, according to a U.S. Securities and Exchange Commission study released on Tuesday.
Instead, the study prepared by SEC staff accountants and lawyers recommended that regulators issue more guidance to help banks and companies determine the fair value of an asset when there is no market for a security.
The fair-value accounting rule requires assets to be valued at market prices and has been blamed for billions of dollars in write-downs by some U.S. banks.
Some banks and lawmakers wanted the SEC to suspend the rule, which they say causes banks to write down assets to fire sale prices when they don't intend to sell the assets right away -- giving investors a misleading picture of their balance sheets.
As part of the government's $700 billion bailout of the financial services sector in October, Congress ordered the SEC to study the rule's impact on financial firms' balance sheets and assess alternatives.
The study found that the accounting rule, also known as FAS 157, 'did not appear to play a meaningful role' in bank failures in 2008. 'Rather, bank failures in the U.S. appeared to be the result of growing probable credit losses, concerns about asset quality, and, in certain cases, eroding lender and investor confidence. For the failed banks that did recognize sizable fair value losses, it does not appear that the reporting of these losses was the reason the bank failed.'
The investment and accounting community have long supported the fair-value accounting rule and say it allows investors to see what is truly on banks' balance sheets -- a conclusion the SEC study also reached.
The report made eight recommendations to improve the accounting standard, such as reconsidering the accounting for impairments and more guidance on how to determine when markets become inactive and whether a transaction is forced.
Under the current accounting rule, assets can be valued based on a simple price quote in an active market. When there is no active market for an asset such as mortgage-backed securities, the value is derived from management's best estimate based on computer models.
An asset is considered impaired when there is a sudden decline in its value. Depending on the type of asset, those impairments can be written off.
The SEC study recommended more guidance to help company accountants decide when to use observable market information and when they should supplement it or use computer models. Accounting guidance is typically prepared by accounting rulemaker Financial Accounting Standards Board and then approved by the SEC.
The report was posted on the SEC's website at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf .
(Reporting by Rachelle Younglai; Editing by Gary Hill) Keywords: FINANCIAL/ACCOUNTING SEC (rachelle.younglai@thomsonreuters.com; +1 202 898 8411) COPYRIGHT Copyright Thomson Reuters 2008. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
WASHINGTON, Dec 30 (Reuters) - There is no need to suspend a controversial accounting rule used to value hard-to-price assets such as the toxic debt underlying the U.S. housing crisis, according to a U.S. Securities and Exchange Commission study released on Tuesday.
Instead, the study prepared by SEC staff accountants and lawyers recommended that regulators issue more guidance to help banks and companies determine the fair value of an asset when there is no market for a security.
The fair-value accounting rule requires assets to be valued at market prices and has been blamed for billions of dollars in write-downs by some U.S. banks.
Some banks and lawmakers wanted the SEC to suspend the rule, which they say causes banks to write down assets to fire sale prices when they don't intend to sell the assets right away -- giving investors a misleading picture of their balance sheets.
As part of the government's $700 billion bailout of the financial services sector in October, Congress ordered the SEC to study the rule's impact on financial firms' balance sheets and assess alternatives.
The study found that the accounting rule, also known as FAS 157, 'did not appear to play a meaningful role' in bank failures in 2008. 'Rather, bank failures in the U.S. appeared to be the result of growing probable credit losses, concerns about asset quality, and, in certain cases, eroding lender and investor confidence. For the failed banks that did recognize sizable fair value losses, it does not appear that the reporting of these losses was the reason the bank failed.'
The investment and accounting community have long supported the fair-value accounting rule and say it allows investors to see what is truly on banks' balance sheets -- a conclusion the SEC study also reached.
The report made eight recommendations to improve the accounting standard, such as reconsidering the accounting for impairments and more guidance on how to determine when markets become inactive and whether a transaction is forced.
Under the current accounting rule, assets can be valued based on a simple price quote in an active market. When there is no active market for an asset such as mortgage-backed securities, the value is derived from management's best estimate based on computer models.
An asset is considered impaired when there is a sudden decline in its value. Depending on the type of asset, those impairments can be written off.
The SEC study recommended more guidance to help company accountants decide when to use observable market information and when they should supplement it or use computer models. Accounting guidance is typically prepared by accounting rulemaker Financial Accounting Standards Board and then approved by the SEC.
The report was posted on the SEC's website at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf .
(Reporting by Rachelle Younglai; Editing by Gary Hill) Keywords: FINANCIAL/ACCOUNTING SEC (rachelle.younglai@thomsonreuters.com; +1 202 898 8411) COPYRIGHT Copyright Thomson Reuters 2008. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.