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Fed’s Bernanke Champions Mark to Market But Says Illiquid Securities Issue Needs Resolution

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Federal Reserve chairman Ben Bernanke has added his voice to the debate about mark to market accounting rules this week. Bernanke is in favour of the controversial accounting rules, which require companies to write down assets every quarter to reflect market value, but cautions that regulators urgently need to deal with the issues surrounding the valuation of illiquid assets.

The Fed chairman believes the rules are good in principle but raised some of his concerns with the House Financial Services Committee earlier this week: “I don’t see a suspension of the whole system as being constructive, because there is a great deal of information in valuing many of these assets. Accounting authorities have a great deal of work to do to try to figure out how to deal with some of these assets, which are not traded in liquid markets.”

Assets that aren’t readily traded due to illiquid markets cause problems for mark to market valuations because there aren’t enough prices available to determine the real value of assets.

Earlier this month, the Financial Accounting Standards Board (FASB) said that it would be revisiting mark to market accounting standards, the American Bankers Association (ABA) has spoken up about some concerns it has about the FASB approach. The association feels that issues underlying the controversial accounting rules are not being taken into account by the FASB, especially with regards to other than temporary impairment (OTTI).

The FASB has launched new projects aimed at improving the measurement and disclosure of fair value estimates in response to calls for more disclosure, as well as recommendations made by the Securities and Exchange Commission in its mark to market accounting study, released last year. However, despite its welcoming of the projects to review and reconcile the process for estimating mark to market values in illiquid markets, the ABA is worried that more should be done.

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