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Mark-to-Market Could be Here to Stay Says SEC, While Cox Talks up Best Practices

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The Securities and Exchange Commission (SEC) is likely to refine the application of mark-to-market accounting rules rather than replace them, according to recent market reports. The regulator is currently engaged in a study of the rules, which it must send to Congress by 2 January. SEC chairman Christopher Cox spoke about some of its findings at a conference this week and indicated his support for fair value accounting, stressing that regulators must develop best practice guidelines, especially for complex or illiquid instruments.

Speaking at a national conference of the American Institute of Certified Public Accountants in Washington, Cox elaborated on some preliminary findings of the SEC’s study, which is primarily aimed at discovering the impact of mark-to-market accounting on bank failures. “Financial reporting is intended to meet the needs of investors and investors have clearly indicated a view that the current concept of mark-to-market accounting increases the transparency of financial information,” he said.

The fair value rules have come under scrutiny as a result of the financial meltdown last year and lobbyists for the banking industry have been urging the SEC to allow greater flexibility in the application of the mark-to-market rule in particular.

Cox said that investments held by banks that are typically marked to market represent a minority of banks’ total investment portfolios. Rather, most institutions hold loans, which don’t typically have to be accounted for at fair value unless they are subject to impairment that is other than temporary. He explained that the SEC study has found that it is proving difficult for institutions to judge whether impairment is temporary or not and this is where additional guidance is needed. “Accounting setters could improve upon the existing security impairment models,” he added.

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