SEC Makes Mark-to-Market Accounting Markedly Better

This week, accounting was suddenly in the national spotlight as policymakers grappled with the ongoing financial crisis. At issue was a concept known as “mark-to-market.” On Tuesday, the Securities and Exchange Commission, along with the Financial Accounting Standards Board, issued new guidance on how companies should apply mark-to-market rules to their balance sheets. Among other things, the new guidance makes clear that: firms can use their own estimates as to the value of a security—based on expected cash flows or other factors—when an active market does not exist; quotes from brokers or pricing services are not necessarily determinative as to value if an active market does not exist; and distressed or forced liquidation sales are not necessarily determinative in measuring value. These clarifications are good ones, and—without fanfare—go far to address the problems with mark-to-market.

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