SEC’s Atkins Calls for Fair-Value Guidance

The commissioner thinks companies may need help in estimating values when there are no yardsticks to measure them.
David KatzApril 25, 2008

The Securities and Exchange Commission needs to issue guidance on how corporations should estimate the fair value of assets and liabilities with no active markets, SEC commissioner Paul Atkins told Reuters on Thursday.

“If you have no value for something because there are no market values to be reflected, then you have to ask whether or not that is truly reflective of what the asset is worth,” Atkins told the news service. “I think we need to come out with guidance to help people deal with that situation.”

Atkins appeared to be referring to the third — and cloudiest — measurement of fair value according to a hierarchy the Financial Accounting Standards Board set up under Statement No. 157, Fair Value Measurements. Within the hierarchy, there are three levels of fair-value estimates in a descending order based on the relative amounts of market information available: in Level 1, an asset or liability can be valued based on a quoted price in an active market; in Level 2, it can be valued based on information other than quoted prices but with “observable market data”; and in Level 3, it can be valued only through “unobservable inputs” and the best available information under the circumstances.

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In his interview with Reuters, Atkins suggested that issuers needed more help in estimating Level 3–type values. “Something is clearly not worth zero. It’s worth something, so what do you benchmark it to? Between us and the accounting firms and the investment banks…we need to come up with some good guidance for people,” he said.

The commissioner wouldn’t tell Reuters the guidance has to be produced quickly. “We have to keep our ears open to the marketplace,” he said. “If we need to formulate more guidance sooner than later, than we have to be ready to do that.”

Many others have expressed such uncertainties about how to mark assets or liabilities to market if there aren’t active markets to measure them. No less than Robert Herz, the chairman of FASB, has expressed discontent with the way the fair-value standard treats liability settlements.

At a recent meeting on fair value by the CFA Institute Centre for Financial Market Integrity, investment manager R. Harold Schroeder pointed to the example of the shifting value of his mother’s New Orleans home following Hurricane Katrina to show how difficult it often is to estimate market value when no market exists. Just after the destructive storm, there was no market for the house; a year later, there was one. While there was no market for the house right after the storm, that doesn’t mean it wasn’t worth anything, Schroeder, the director of relative-value arbitrage at Carlson Capital, contended.