Thursday, October 9, 2008

SEC Plays Fair on Mark to Market

SEC to CFOs: You Can Be Flexible on Fair Values
The SEC sent letters to about 30 CFOs of financial institutions last month outlining information they should include in financial statements if they're using measures other than market prices for valuing certain assets. As reported, the SEC also issued guidance last week to companies saying they needn't rely exclusively on market prices.

"It's not a get-out-of-jail-free card, but it's an opportunity to say 'here's a rationale as to why we're using an alternative valuation,'" said Brian Lane, a former director of the SEC's division of corporation finance. He said it will give companies flexibility to use other data, such as historical pricing, to come up with a value. "If you can lay out the case, you can try it. You have to put in some disclosure about how you arrive at that."
The letters, which are dated September 2008 and sent in the middle of the month, say executives should "continue to evaluate whether you could provide clearer and more transparent disclosure regarding your fair value measurements."

For example, if a company is relying on discounted cash flow instead of market prices to determine the value of a security, the SEC is urging companies to disclose whether assumptions were changed from earlier periods.
Companies are also being prodded to say whether they use quotes from brokers and explain if they picked a quote from a new broker -- which could indicate they were shopping around for a favorable number.
Kara Scannell at the Wall Street Journal

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