Earlier today, the SEC and FASB issued a press release meant to address concerns about the effects of mark-to-market accounting, specifically FAS 157, as they relate to the current financial "crisis". I’ve been working on this in much greater detail for the past week or two (check out the re:the auditors for some interesting perspectives until I get around to finishing, eventually) but below I’ve presented an easily-understandable translation of the SEC’s responses to their own FAQ’s:
Q: Can management's internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?
A: Yes, no, maybe, sometimes. It depends. Really, we're just clarifying the already vague language of FAS 157 (etc) with even more vague, open-ended language. Thats just how we roll (, dawg).
Q: How should the use of "market" quotes (e.g., broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?
A: Yes, but only if it represents an actual transaction price and/or a binding offer. Unfortunately, since auditors and internal valuation groups have been using pricing services as the de facto source for the past few years as if it was level I-type information (when in fact the price may come from the service’s models or other data), this doesn’t much help now. Add to the fact that per Deloitte's own survey on Fair Value Pricing (2008),
"Over 46 percent of survey participants stated they have at least two full time resources focused on fair valuation as compared to 29 percent last year."
Uh, so 54% use 2 (or fewer) sources? How encouraging...
Q: Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?
A: Last line of their explanation pretty much sums it up:
“Determining whether a particular transaction is forced or disorderly requires judgment.”
Oh, thanks for
clarifying. Read the press release (or the original FAS 157 guidelines), FAsb's means of defining terms here is a serious clusterf*ck
of the most circuitously ambiguous kind. Worse than interest expense (#ERROR) in a merger model, I shit you not.
Q: Can transactions in an inactive market affect fair value measurements?
A: Again, last line sums it up:
” The determination of whether a market is active or not requires judgment.”
No shit, sherlock.
Q: What factors should be considered in determining whether an investment is other-than-temporarily impaired?
A: Uh, I’ll take D – all of the above?; Again, lots of ambiguity and words in “” marks like “Rules of thumb” and “reasonable judgement”.
Summary: More ambiguous bullsh*t from some of the same schmucks whose bright idea(s) played no small part in getting us into this mess in the first place. Who knows, they’ve got a “meeting” coming up shortly, maybe (hopefully) they’re just saving the big reveal (step 1: remove head from ass…) for Friday?