Recent Developments in Mark-to-Market Accounting Rules
The Securities and Exchange Commission (SEC) has taken steps to reassess and refine the application of “mark-to-market” rules, with plans to issue a complete study of fair value accounting practices on January 2, 2009. On December 8, SEC Chairman Christopher Cox shared some preliminary findings of the study, which indicated that fair value accounting measurements would likely be not suspended, despite significant criticism of the rules from many banks, financial regulators and economists.
Chairman Cox stated that, based on recent roundtables with market participants, investors benefited from transparent financial reporting of mark-to-market assets and that, to insure a healthy market, “the content provided to investors should not be compromised to meet other needs.” However, he recognized that fair value measurements of securities traded in inactive or illiquid markets pose a particular challenge to the financial institutions holding them, and that the SEC was investigating more robust guidelines for auditors and statement preparers to apply these rules.
Furthermore, on December 15, the Financial Accounting Standards Board announced that it is examining the possibility of broadly applying mark-to-market rules beyond securities to loans, bonds, derivatives and stocks to create more uniform accounting procedures.
The debate over mark-to-market has, on one side, critics who say this accounting approach ignores long-term values and creates write-down losses that deplete bank capital, while, on the other side, supporters say sufficient and clear information is necessary for investor confidence. In the nearly overnight collapse of insurance giant AIG, many critics faulted mark-to-market rules for quickly exaggerating the company’s unrealized losses and creating market volatility. Rather than create balance sheets based on mark-to-market assets, financial institutions might value gains and losses over a multi-year period, a historical approach currently taken by pension funds and other conservative investment instruments.
