Fantastic! The SEC issued an interpretation of an accounting standard that could make it easier for banks to report smaller losses, or perhaps even profits, when they announce results for the third quarter, which ended Tuesday.
So far, the move on Tuesday drew praise from the ABA, which whined to the SEC that auditors were forcing banks to value assets at drastically low “fire sale” prices, and rather than at the higher values the banks believe the assets should be worth in an orderly market.
Some of the congress”girls” had pressed to order a suspension of the fair-value rule, known as SFAS 157, as part of the bailout bill that the House defeated on Monday, but that may be saved later. That bill stopped quickly, but did require them to study the rule and approved the SEC to suspend it.
The SEC said it was “interpreting”, not “changing”, the rule. Which is of course a very wussy answer. Anyway, the immediate praise from the bankers could reduce the pressure to drop it and make it easier for some of the congress”girls” to change their votes. The statement was issued jointly by the commission’s chief accountant and the staff of the FASB.
Companies are required to mark many financial assets to their fair value, but rule 157 show them how that was to be measured, saying that market values should be used if they are available. Many mortgage securities have plunged in value, forcing large write-offs by financial institutions that own them. Bankers have been crying that the current market prices are far below what the securities should be worth, and say that they should not be forced to take write-downs that are sure to be reversed later.
The rule had exceptions, saying that “distress sales” need not be used as the basis for reporting, but it was unclear how broadly that could be interpreted. Some auditors argued that more than one or two sales at a level provided a real market price, and thus should be used for valuing that security and similar ones.
Under rule 157, there is a hierarchy of valuation techniques. The first is when there is an active market for a security, which must always be used. If there is no such market, level two is based on prices of similar securities. Only if those are not available is level three to be used, which depends on the company’s model of value in the absence of a usable market price.
Companies now must report on assets moved between levels, but it is not clear if they would have to disclose that the move came about because of a different interpretation of the rule, rather than a change in the availability of market information.