Banks to SEC: Overrule FASB Fair-Value Guidance

The American Bankers Association wants the commission to wave aside liquidity risks in mark-to-market accounting.
David KatzOctober 13, 2008

Stepping up its attack on mark-to-market accounting, the American Bankers Association today called on the Securities and Exchange Commission to override guidance issued by the Financial Accounting Standards Board on how to apply FASB’s controversial standard on disclosures of fair-value measurements.

The banking association has been arguing for months that FAS 157, Fair Value Measurements, has forced financial institutions to assign fire-sale prices to their distressed assets, thereby making a bad situation worse. Now the ABA it is going after the staff guidance, FAS 157-3, on similar grounds. “Given the importance of this issue, the impact it has on the crisis in the financial markets, and the seeming inability of the FASB to address in a meaningful way the problems of using fair-value in dysfunctional markets, we believe it is necessary for the SEC to use its statutory authority to step in and override the guidance issued by FASB,” Edward L. Yingling, president and chief executive officer of the ABA wrote in a letter to SEC Chairman Christopher Cox.

Contending that the standards board “still refuses to recognize the realities of the current situation”—the meltdown in financial markets— Yingling attacked FASB’s statement in its guidance that the risk of a lack of liquidity be included in gauging the cash-flow of distressed assets when they’re sold.

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The SEC could not be reached for comment, and FASB communications director Neal McGarity said that the board would have no comment on the letter. But FASB Chairman Robert Herz has long argued that fair-value measurements should take market fluctuation into account.

Similarly, the staff guidance states: “Regardless of the valuation technique used, anentity must include appropriate risk adjustments that market participants wouldmake for nonperformance and liquidity risks.”

Yingling, however, called the staff guidance as “circular” in its reasoning. Although FASB’s staff begins the document with “improved guidance,” stating that “distressed sales do not represent genuine fair value,” the ABA executive says, the inclusion of liquidity risk in the equation “brings the guidance full circle back to distressed sale values.”