SEC Loosens Mark-to-Market Rules

October 2, 2008 at 5:58 pm Leave a comment

Yesterday, the Office of the Chief Accountant of the Securities and Exchange Commission (SEC) provided further interpretation and clarification regarding the mark-to-market rules, otherwise referred to by the SEC as the determination of “fair value” rules or Statement 157. A copy of the SEC’s press release can be found at http://www.sec.gov/news/press/2008/2008-234.htm. FASB is also preparing additional guidance regarding FASB Statement No. 157, Fair Value Measurements (Statement 157), which the SEC anticipates will be available later this week.

But, because of the current environment, the SEC provided the following clarification now:

  • When an “active market” does not exist, management may use internal assumptions when measuring fair value.
  • The SEC did not define “active market,” but noted that its determination requires judgment. Accordingly, the SEC warns that clear and transparent disclosures are critical to providing understanding of the judgments used by management. The SEC also stated that a significant increase in the spread between the amount sellers are “asking” and the price that buyers are “bidding,” or the presence of a relatively small number of bidders, are factors suggesting an inactive market.
  • Broker quotes carry less weight in the determination of fair value if an active market does not exist.
  • The results of distressed or forced liquidation sales are not determinative when measuring fair value. A transaction value has more weight when the buy-sale is conducted in an “orderly” manner with willing market participants and adequate exposure to the market.
  • In an “active market”, a quoted market price is most representative of fair value and thus is required to be used (generally without adjustment). While transactions in inactive markets may be inputs when measuring fair value, they are likely not to be determinative.
  • If prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value.

The SEC also provided guidance in determining whether an investment is “other-than-temporarily” impaired. As this determination also requires significant judgment, the SEC directs companies to consider (among other items) the following: (i) the length of the time and the extent to which the market value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; or (iii) the intent and ability of the holder to retain its investment in the issuer long enough to allow for any anticipated recovery in value.

Entry filed under: Client Alerts.

Senate Proposed Bailout/Stabilization Legislation “Emergency Economic Stabilization Act of 2008” Summary of the Emergency Economic Stabilization Act of 2008 (“EESA”)

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Enter your email address to follow this blog and receive notifications of new posts by email.

Produced & Maintained By

Stinson Leonard Street Logo

Categories

A legal resource for Banking & Financial Services

Archives


%d bloggers like this: