On November 21, 2007, the SEC held a Roundtable discussion to assess whether the fair value accounting rule which requires assets to be valued at market prices, should be changed or replaced. FAS 157 have been blamed for contributing to the global financial meltdown when AIG and other big financial institutions took billions of dollars in write-downs. According to Reuters, the consensus among the panel of accountants is that the rule should not be replaced but modified to provide for more disclosure on how banks value assets in an illiquid market.
Under the rule, assets can be valued based on a simple price quote in an active market. However, when there is no market for a security, management’s best estimate for the hard to price asset is generated from computer models. This practice does not provide for a critical assessment of an asset’s value. Wayne Landsman, professor of accounting at Kenan-Flager School, the University of North Carolina, suggested that more information is needed in the valuation process so users can assess whether it’s a good number or not. Donald Nicolaisen, the SEC’s former chief accountant added that enough information is needed in the market place so that the market can absorb, digest and compare companies.
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