FASB, SEC Commit To Provide Fair Value (Mark-to-Market) Guidance By April 2

At a Congressional hearing on mark-to-market accounting on March 12, 2009, FASB Chairman Robert Herz, and SEC Acting Chief Accountant Jim Kroeker, committed to providing guidance on fair value accounting in illiquid markets within three weeks. It appeared Congress was asking for final - not proposed guidance - within the three-week timeframe, which ends on April 2, coinciding with the start of the next G-20 meeting.

The promise was extracted from the standard-setters after the FASB chairman initially said he anticipates releasing proposed guidance in early April, and final guidance by the end of second quarter.

Rep. Paul Kanjorski (D-PA), chair of the Capital Markets Subcommittee of the House Financial Services Committee, noted in his opening remarks, “Mark-to-market accounting did not create our economic crisis, and altering it will not end the crisis. But improving the application of a fundamentally sound principle that is having profound adverse implications in a time of global financial distress is imperative. Therefore, our hearing today is about getting Financial Accounting Standards Board and the Securities and Exchange Commission to do the jobs they are required to do.” He added, “Emergency situations require expeditious action, not academic treatises. They must act quickly.”

“There are three pieces of legislation presently pending in Congress,” noted Kanjorski, with respect to mark-to-market accounting or accounting standard-setting generally (e.g. HR 1349 co-sponsored by Rep. Ed Perlmutter (D-CO) and Rep. Frank Lucas (R-OK) which would create a Federal Accounting Oversight Board). Kanjorski added, “I guarantee you one of those pieces of legislation is going to become law before early April.

Rep. Gary Ackerman (D-NY) responded to FASB’s current timetable, “If you are going to act, you’ve got to do it real quick.”

Herz responded, “I have heard you very clear, we will go back and consider exactly how.”

Ackerman asked, “Can you do this in three weeks?”

“We probably could,” said Herz, adding, “I have to talk to the other members of my board.” Ackerman pressed him as to when that discussion would take place; Herz responded “When I get back tonight.”

Addressing a question to Herz and Kroeker, Ackerman said, “With the right cooperation between the two of you, can you do this in three weeks?”

Kroeker answered, “We can absolutely work with the FASB, we expect action within weeks, not months, my staff stands ready to assist the Commission in any way possible if we don’t see that action.”

Herz observed, “We could have the guidance in three weeks; whether it will fix things, I don’t know.”

Ackerman responded, in effect, that wasn’t the question he was asking, but whether “It can, and will be done in three weeks?”

“Yes,” answered both Herz and Kroeker.

Herz later couched his response by noting that he was one member of a five member board at FASB.

Rep. Tom Price (R-GA) asked, “Do we need to bring the other four board members in here?”

Herz replied the other board members were probably listening to the hearing (webcast), and in terms of meeting the Congressmen’s request, added, “We will do everything we can.”

Investors, Bankers Share Views
The second panel of the day included investor representatives (Jeff Mahoney, General Counsel, Council of Institutional Investors, and Cindy Fornelli, Executive Director, Center for Audit Quality) banking and financial services representatives Thomas Bailey, Chairman, Pennsylvania Association of Community Bankers, and President and Chief Executive Officer, Brentwood Bank, and Lee Cotton, Past President, Commercial Mortgage Securities Association) policy analyst ( Tanya Beder, Chairman, SBCC Group, and Robert (Bob) McTeer, Distinguished Fellow, National Center for Policy Analysis) as well as former FDIC Chairman William Isaac.
When asked by a Congressman, “What would you have us do?” Fornelli replied, “A two pronged approach, one on the regulatory capital side with the banking regulators, the other is addressing these application problems with fair value accounting, both in the proposals FASB talked about with how to give better guidance to how to apply valuations in illiquid markets, and also on OTTI, which we heard about this morning, which I don’t think is [currently being worked on] by the FASB. Mahoney said he would support more robust disclosures.

Fornelli noted, “The SEC currently allows that disclosure in footnotes and MD&A,” adding, “one recommendation CAQ made in its Nov. 2008 letter [to the SEC] was for the SEC to give even more clarity around that.”

Isaac said, “I’m all for all the disclosures you want to make, but don’t run these mark-to-market losses through income and balance sheet, what we do need is bank examiners and accountants in there, with their sleeves rolled up, giving these things true economic value so we all know what they are.”

Rep. Spencer Bachus, Ranking Member of the House Financial Services Committee, noted he had first called for this hearing in October of 2008, when he received a letter from then-Financial Accounting Foundation (FAF) Chairman Robert Denham. He said the letter “basically told me to butt out.. said we don’t need any political interference; that was also the same day we passed TARP [referring to the Emergency Economic Act of 2008], and the reason for his letter [was], Rep. Roy Blunt (R-MO) and I included in the legislation a study of mark-to-market accounting and determine if it was destroying [capital/valuations] or loan provisioning.” At the end of the hearing, Bachus asked that the FAF letter be entered into the record of the hearing. (Another item being added to the record of the hearing, at the request of Rep. Lucas, was written testimony from Former Speaker of the House Newt Gingrich.

Bachus also mentioned he was a follower of panelist Bob McTeer’s Blog, particularly his post, My Mark-to-Market Nightmare.

Legislative Solution Threatened If Improvements To Accounting Standards Don’t Materialize
Although numerous Congressmen said they did not believe Congress should get directly involved in setting accounting standards, Kanjorski said at the close of the first panel that if FASB and the SEC do not deliver what they promised to deliver (i.e. fair value guidance within three weeks), he would call a followup hearing when Congress returns from its Easter/Passover recess in mid-April. “At that time,” added Kanjorski, if the guidance on fair value in inactive markets is not done, “we will work on legislation expeditiously to cure the problem.”

He reiterated at the end of the hearing, referring to the standard-setters and regulators that had appeared on the first panel (Herz, Kroeker and Bailey) and referring to the current rules for mark-to-market accounting (fair value), “We expect those three gentlemen to show the American people, show the street, that they can function; I was very serious, as soon as we get back from Easter break, we will have a hearing, if we are not notified in the meantime that there is a change in the rule.”

Further details on the hearing, including the discussion regarding other-than-temporary-impairment (OTTI), credit vs. liquidity writedowns, banking regulators’ ability to adjust capital requirements, and more, can be found in this FEI summary. NOTE: Only FEI members can download the detailed summary, one of the benefits of FEI membership, in addition to our other networking, education and advocacy activities. (For an example of advocacy efforts, see the joint comment letter filed by FEI’s Committee on Corporate Reporting and the U.S. Chamber of Commerce Center for Capital Market Competitiveness Nov. 25, 2008 on fair value.) Learn more about FEI membership, including our special offer to attend FEI’s Summit Conference May 4-6 at the Gaylord Texan Resort in Grapevine TX for free, if you become a new member by April 6, and feel free to email me for more information at eorenstein@financialexecutives.org .

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FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI

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