The current issue of The Ticker (October 14, 2008) has a special section on the “Market Meltdown” and one of the stories is an interview with Prof. Terrence Martell where he is asked about the suspension of FASB 157 which requires mark-to-market accounting. He tells a compelling story about how mark-to-market works today.
FASB157, called the Fair Value accounting rule, requires companies to value their assets based on market prices. But what happens when there is no market because the credit markets are frozen? Here is how the SEC, FASB, and others are addressing the problem.
On September 30th the SEC offered clarification of the rules that addressed how to determine fair value when there is no active market for a security.
FASB issued a Staff Position Paper that addressed “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.”
The Emergency Economic Stabilization Act included a provision that the SEC, along with the Fed and the Treasury, study the impact of mark-to-market accounting on banks. Details are in the SEC press release.
A panel of the International Accounting Standards Board (IASB) produced a report on “Measuring and disclosing the fair value of financial instruments in markets that are no longer active.”