Bowing to pressure from Congress and industry groups, the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) have issued a last-minute clarification that will allow companies to use expected cash flows to value illiquid mortgage assets in preparing their third-quarter financial reports.
The two accounting bodies stopped short of suspending a fair-value accounting rule (Financial Accounting Standard 157) that some of members of Congress are trying to kill as part of a $700 billion financial stabilization bill.
"When an active market for a security does not exist, the use of management estimates that incorporate current market participants' expectations of future cash flows, and include appropriate risk premiums, is acceptable," according to a joint statement by SEC and FASB staff.
Critics have been complaining that FAS 157, which went into effect Jan. 1, has forced banks and other financial institutions to value some assets at fire-sale prices. This rule has exacerbated the credit crisis by forcing "massive writeoffs," according to the Consumer Mortgage Coalition.
"It makes no sense to unnecessarily cripple institutions that could otherwise weather this storm of financial uncertainty by being forced to continue to mark down their assets to unrealistic fire sale prices," CMC executive director Anne Canfield said in a letter to SEC Chairman Christopher Cox.
