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SEC, FASB Back Changes in Fair Value Accounting

Clarifying "mark to market" accounting should be good news to executives and could be one of the few positives to come out of the financial crisis. The U.S. Securities & Exchange Commission and the Financial Accounting Standards Board issued a joint statement Sept. 30 recommending that companies be given more leeway as they value certain assets.

"Mark to market" accounting, which tries to assess the value of assets according to the current market price without considering the market's condition, has been blamed for unfairly forcing banks and investment houses to mark down their assets, such as securitized loans, at unrealistic rates.

When "mark to market" starts to dissolve balance sheets, for example, many banks find their ratings downgraded, which in turn makes them take steps to ameliorate their possible losses, such as bumping up adjustable rates or requiring more collateral for deals. Among the new recommendations is that asset values assessed in forced liquidations should not be the major determinative factor in assessing fair value. "Mark to market" accounting became popular in the 1990s with firms such as now-defunct Enron.

This post first appeared in BNET's Corner Office.

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