Seems like the SEC at least partly listened to IJ on the MTM issue - companies will be able to explain why they think the number they disclose might be wrong:
SEC Plan Has Potential for False Hopes
By DAVID REILLY
March 17, 2008 (Associated Press) -- Just as companies are closing their books on another tumultuous quarter, regulators are working on a plan that would let them tell investors that things may not be as lousy as they seem.
The Securities and Exchange Commission is expected to tell public companies that while they still need to use market prices for many of the instruments they hold no matter how bad those prices look, they can also give investors a wider range of the possible values for those securities.
The guidance is aimed at giving investors more information about prices that are difficult to gauge because many markets have seized up in recent months. Some observers worry, though, that companies could use the opportunity to soften the blow of big losses in markets where the value of even safe securities have been battered by mortgage defaults, hedge-fund implosions, worries about inflation and recession fears.
Chairman of the House Financial Services Committee Barney Frank, a Democrat from Massachusetts, says there is an urgent need to look at mark-to-market accounting because it's having a "downward pull" on the economy. Mr. Frank says he is in touch with regulators and will hold a hearing when Congress returns from break next month.
The SEC move won't change the actual accounting for instruments torched by the credit crunch. In many cases, companies will still have to use market prices and so record big hits to profit, on instruments that some executives believe won't ultimately show long-term losses. But they will allow companies to give a range of alternatives in the text of their earnings reports.
Until now, if a company said a security was worth X when the market priced it at Y, it risked running afoul of regulators, who could challenge its method for coming up with that alternative figure.
The SEC plans to tell companies, as soon as next week, that they can provide ranges for the values that surround those market prices. But the agency, whose plans could change, is expected to suggest that companies explain how they've come up with the values, especially in cases where there isn't an active market for a security and, as a result, a model has to be used for pricing.
The risk is that this could also allow companies to present overly rosy views of the losses they are facing. That could lull investors and analysts into a false sense of comfort, some fear, much in the same way overly optimistic assumptions about mortgage defaults spurred the current crisis.
"It probably does give business some discretion and wiggle room," says James Cox, a securities-law professor at Duke University. "They're going to be able to describe a range of possible outcomes without going to the more-conservative outcome.
"The minute you start introducing ranges and judgments, it's a fertile area for opportunistic behavior," Prof. Cox said. "I'm not against it, but we need to understand there will be instances of inappropriate or fraudulent behavior."
Others argue investors are better off with more information, even if abuse is possible.
"If management has a heartfelt judgment as to a range of values, investors might like to hear that," said Michael Young, a partner with Willkie Farr & Gallagher LLP who specializes in financial-reporting issues. "Can a range be manipulated? Sure. But a range communicates the imprecision of these numbers, and it's useful for investors to see the highly judgmental nature of the process.
The SEC's soft-touch approach - not backing off the use of market-value accounting while providing a way for companies to soften the blow of currently depressed prices - echoes other recent efforts by the agency to alleviate market stress. In December, the SEC sent letters to more than a dozen financial institutions "reminding" them of their obligation to disclose a host of details about their exposure to off-balance-sheet financing vehicles.
In January, the SEC's chief accountant took a more-controversial step, saying banks and mortgage companies could modify mortgages without triggering accounting rules that would put the debt onto the company's balance sheet. To address liquidity problems in the market for auction-rate securities, the SEC said Wednesday that local governments could buy their own debt. If governments step in, it can prevent auctions from failing and triggering high interest rates.
The SEC's effort on mark-to-market disclosures is expected to come in the form of a letter that will be posted on the agency's Web site. It is timed to be sent by the end of the first quarter, which is when all companies need to comply with market-value measurement rules when using market prices for financial instruments.
"It would be an appropriate time to remind people of their obligations and suggest what they might want to highlight in their report," said John Nester, a spokesman for the SEC.
For instance, the SEC is considering recommending companies explain how they got the market-value number, disclose the extent to which that number depends on financial models, and provide the potential variability of that number, or how firm or sensitive to change it is, and a reasonable range.
The SEC's guidance is seen as a precursor to a larger debate over how best to price securities, especially when markets freeze up. That comes amid a growing outcry among companies, as well as some regulators and investors, who say the use of such market values is exacerbating the current financial crisis.
Two weeks ago, during testimony before the Senate banking committee, Federal Reserve Chairman Ben Bernanke noted his agency's unease over the use of mark-to-market accounting and said it is "one of the major problems we have in the current environment." But he added that there wasn't a clear alternative to the approach.
accounting.smartpros.com
See also:
bloomberg.com
Peter |
