Last week, the U.S. House Financial Services Subcommittee members turned up the pressure on accounting regulators to do something about the fair value rules, which so many have blamed for a large part of the financial meltdown. Compliance Week reports that the Financial Accounting Standards Board met Monday to begin hammering out guidance on defining inactive markets and how to properly account for fair value in those markets.
CFO.com writers Sarah Johnson and Marie Leone say the House subcommittee chair, Pennsylvania Democrat Paul Kanjorski, urged the regulators to dispense with their normal rule-making process and quickly adopt new rules for fair value. "This is an emergency situation that requires expeditious action, not academic treatises.They must act quickly," he reportedly said.
Representatives from the FASB and the Securities and Exchange Commission worked to explain that the problem was most likely not with the fair value accounting rules but how they have been interpreted and applied, the story says. Acting SEC Chief Accountant James Kroeker testified, "Accounting did not cause this crisis and accounting will not fix it, but accounting should not make it worse." Responding to the pressure, the FASB's chairman, Robert Herz, told legislators the board could provide some guidance on the issue in a matter of weeks. CFO.com says:
FASB is working on guidance that could change how companies assess an asset's fair value in an inactive or illiquid market. This advice will stress the need for judgment and move practitioners away from the tendency to consider the last price for which a financial instrument has been traded as its fair value.
In what Compliance Week calls an atypical meeting on Monday, the FASB began developing that advice. Writer Tammy Whitehouse says:
[The guidance] will outline the factors entities should consider in determining, in the context of Financial Accounting Statement No. 157 Fair Value Measurement, whether recent transaction prices should be regarded as 'distressed' and therefore not an adequate yardstick alone for establishing fair value.
She quotes FASB member Leslie Seideman: "(FAS) 157 already says right now that a price from a forced sale or distressed transaction does not represent fair value. What we're talking about here is how do I know when I have one of those? And if I do have one of those, what do I do?"
The board is responding to the pressure from Congress, but that doesn't mean its members are happy about it. Member Tom Linsmeier said, "The frustration was an assertion that we had done nothing in recognition of these issues over time. That's absolutely not the case."