Postcard from the AICPA Conference


By Donald Applegarth

At the AICPA National Conference on Current SEC & PCAOB Developments (the Conference) held in Washington, D.C. December 8 – 10, 2008, Chairman Cox spoke on the mark to market study mandated by the Emergency Economic Stabilization Act of Act 2008 which is due by January 2, 2009.

The Emergency Economic Stabilization Act of Act 2008, enacted and signed by the President on October 3, 2008, among other things requires the Commission to conduct a study of "mark-to-market" accounting applicable to financial institutions, including depositary institutions, and submit a report to Congress with the findings and determinations within 90 days. Specifically Section 133 of the Act provides as follows:

The Securities and Exchange Commission, in consultation with the Board [of Governors of the Federal Reserve System] and the Secretary [of the Treasury], shall conduct a study on mark-to-market accounting standards as provided in Statement Number 157 of the Financial Accounting Standards Board, as such standards are applicable to financial institutions, including depository institutions. Such a study shall consider at a minimum—

  1. the effects of such accounting standards on a financial institution's balance sheet;
  2. the impacts of such accounting on bank failures in 2008;
  3. the impact of such standards on the quality of financial information available to investors;
  4. the process used by the Financial Accounting Standards Board in developing accounting standards;
  5. the advisability and feasibility of modifications to such standards; and
  6. alternative accounting standards to those provided in such Statement Number 157.

At the Conference, Chairman Cox’s was quoted on three preliminary findings:

“Although the study is not complete, the current direction indicates a number of preliminary findings that I would like to share with you this morning.

First, for many financial institutions, investments marked-to-market through earnings on a quarterly basis represent a minority of their total investment portfolio. A larger portion of investment portfolios consist of available-for-sale securities or loans. As you know, investments in loans and available-for-securities are not marked-to-market through earnings each period. Rather, these securities are subject to (in some cases, difficult) judgments on other-than-temporary impairments.

Second, most investors, and many others, agree that fair value is a meaningful and transparent measure of an investment for financial reporting purposes. Financial reporting is intended to meet the needs of investors. While financial reporting may serve as a starting point for other users, such as prudential regulators, the information content provided to investors should not be compromised to meet other needs.

Third, accounting standards have served our capital markets well, but we must endeavor to continue to develop robust best practice guidance for auditors and preparers – particularly for fair value measurements of securities traded in inactive or illiquid markets. Education efforts and the development of application guidance must provide a path for auditors and preparers to reach a common ground on these difficult issues.

The work we have already done suggests that the accounting standard setters could improve upon the existing security impairment models. Investors have also clearly indicated a view that the current concept of mark-to-market accounting increases the transparency of financial information provided to investors – but that in inactive or illiquid markets, additional guidance would be useful to promote reasonable application of standards.

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