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SEC Moves to Clarify Fair-Value Rules

The coming announcement could give companies more latitude when it comes to pricing certain assets.
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Regulators are planning to provide additional guidelines later this week on the existing rules governing fair-value accounting, the

Securities and Exchange Commission

said Tuesday.

The coming announcement could give companies more latitude when it comes to pricing certain assets, allowing some valuations to be based on expectations rather than actual sales that occur in the marketplace.

Financial companies including







Merrill Lynch


have taken tens of billions of dollars in writedowns in recent months, as certain securities they own, many of them tied to mortgages and some of which have seen trading seize up, have fallen sharply in market value.

In attempting to clarify the application of fair-value accounting, the SEC said that when an active market for a security doesn't exist, a company's management can offer estimates on pricing that incorporate projections of future cash flows and include the appropriate risk premiums.

"The current environment has made questions surrounding the determination of fair value particularly challenging for preparers, auditors and users of financial information," the SEC said. "The SEC's Office of the Chief Accountant and the staff of the

Financial Accounting Standards Board have been engaged in extensive consultations with participants in the capital markets, including investors, preparers and auditors, on the application of fair-value measurements in the current market environment."

Additionally, broker quotes can be used to help determine fair value, but they won't necessarily represent the true "market" price if an active market doesn't exist for a given security, the SEC said. Also, whether a market is active or illiquid "requires judgment," the agency said.


Because fair value measurements and the assessment of impairment may require significant judgments, clear and transparent disclosures are critical to providing investors with an understanding of the judgments made by management," the SEC said.

Some market observers have recommended that the suspension of mark-to-market or fair-value accounting could help stem the downturn in the financial sector, but


reported that such a move was unlikely, citing people with knowledge of the situation.

The SEC's comments came on the same day the

stock market

staged a mammoth rally amid hopes for a new government


package -- a surge that followed an even more pronounced selloff on Monday when the first rescue plan was defeated in Congress.

Financial stocks were among the best performers, with the KBW Bank index up more than 15% and the Amex Securities Broker/Dealer index better by 11%.

This article was written by a staff member of