SEC Weighs in on Accounting Concern Linked to MBS

Fair value accounting can be improved to address concerns about the impairment of mortgage securities during the financial crisis, but it should not be suspended as requested by some banking groups, according to the Securities and Exchange Commission. The commission has just completed congressionally mandated report that concluded that fair value or market-to-market accounting did not play a "meaningful role" in the bank failures of 2008. Financial services groups have complained that the mark-to-market accounting has forced institutions to take larger than appropriate writedowns, which has contributed market instability and bank failures. The Independent Community Bankers of America said mark-to market accounting does not reflect the reality of community banking and it is "disappointed" that the SEC did not recommend suspension. SEC analysis of bank failures shows that fair value accounting was applied to only a "small minority" of bank assets and losses did not have a significant impact on capital. The SEC indicates in the report that it supports a Financial Accounting Standards Board proposal that allows management to use judgment in assessing whether an impairment loss is expected to be temporary. FASB is expected to finalize the proposal Jan. 8. SEC also indicated support for FASB's project to allow reversal of impairments on debt securities when sufficient evidence demonstrates a recovery.