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SEC new guidance on FAS 157

The SEC aren't waiting for Congress to approve the "bailout" in order to start addressing the issues created by FAS 157.  There's an article in today's WSJ – Regulators Ease Securities-Valuation Rules that give some background.

You can also see the tension between easing this regulation and completely suspending it – the clarification allows:

"…executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices."

Judgment doesn't necessarily translate into transparency – exactly the issue that FASB was attempting to address with FAS 157 in the first place.

As I said in my last post:

"FAS 157 works fine until you have to contend with an illiquid asset such as a private company stock or (as in the current crisis) mortgage backed securities when the credit market dries up."

It's a challenge to see how to balance this tension – even a full set of disclosures are going to be difficult to investors to interpret.  I suspect we'll see such disclosures in future 10-Qs providing an explanation of the "judgment" that has been applied in valuing such assets.

Comments

Stu Phillips

Thomas - this is along the lines of 409A valuation reports used by start up companies to assess a value for their common stock.

What concerns me most is transparency - the lack of which is another underlying factor with the whole financial mess we're in - no one understands who is exposed to what!

Thomas

Why can't we have an independent clearing house agency that blesses any valuations that use models? Adding an outside and impartial second-opinion on model valuation of these securities can't be a bad thing. Leaving it up only to the executives puts us back 5-10 years to when execs used the valuations to manage earnings.

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STU PHILLIPS
MENLO PARK, CALIFORNIA

Intense Brit, lived in Silicon Valley since 1984. Avid pilot, like digital photography, ham radio and a bunch of other stuff. Official Geek.

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