FAF Not Thrilled with SEC Adjustment to Mark-to-Market

The Senate (and eventually the House) gave permission to the Securities and Exchange Commission to suspend "mark-to-market" rules on securities held when no ready market exists. The SEC and Financial Accounting Standards Board issued a "clarification" that internal management estimates of cash flows could be used to measure fair value when no market evidence exists. Broker models and quotes could be considered in these estimates, but should not be used by themselves in an inactive market, according to the SEC. Reaction to the announcement was mixed with the American Bankers Association praising the decision while the Financial Accounting Foundation, FASBs parent, criticizing the SEC for letting political considerations get in the way of independence in the standards-setting process.

Given the state of the "bailout" bill, the "mark-to-market" in pre-October form was politically doomed. Personally, I prefer an approach similar to the "floor and ceiling" approach used in lower of cost or market inventory to using management estimates of cash flows--the latter seems to lack independence.