UPDATE 1-U.S. SEC advisory group seeks fair value restraint

(Adds further background on fair value debate, notice of Friday press conference)

By Kim Dixon

WASHINGTON, July 31 (Reuters) - Advisers to U.S. securities regulators have recommended a cautious approach to an investor-backed valuation scheme and sought an easing of requirements for restating financial reports.

A Securities and Exchange Commission advisory panel voted on Thursday to approve a slew of recommendations to the SEC as it considers ways to cut complexity and increase the usefulness of financial information for investors.

Among the most contentious recommendations is a plea to take a "judicious approach to further expansion" of so-called fair value accounting.

"It's not rejecting the move toward fair value, but a recommendation of a balanced approach," said Edward Nusbaum, chief executive of accounting firm Grant Thornton and a member of the SEC's Advisory Committee on Improvements to Financial Reporting.

Some investors have been pushing for broader use of such accounting rules, which require companies to value even hard-to-price assets, such as mortgage-backed securities, at current prices. These investors believe fair value accounting makes the true value of companies' balance sheets clearer.

Critics say regulators have been too quick to embrace fair value accounting, which has forced companies to raise more capital to offset losses from securities that in some cases have not yet defaulted. In short, fair value can create unnecessary problems rather than highlighting weakness.

"Fair value can be beneficial but at the same time it's hard to apply fair value to items that are not traded," said Nusbaum.

The advisory panel recommendations come a day after U.S. accounting rulemakers decided to delay a measure that could have forced assets onto banks' and financial companies' balance sheets. Some investors say banks and others used off-balance sheet vehicles to hide the full extent of their liabilities and create a "shadow banking system."

Critics of the proposed Financial Accounting Standards Board measure say they will force already weakened banks to raise even more capital.

SEC Chairman Christopher Cox has scheduled a news conference for 11 a.m (1500 GMT) Friday to receive the advisory committee report. Other participants include FASB Chairman Robert Herz and advisory panel chairman Robert Pozen, chairman of MFS Investment Management.

VALUES AND RESTATEMENTS

Under U.S. accounting rules, assets can be valued based on a simple price quote in an active market. The next level is "mark to model," based on observable market prices and inputs. The hardest-to-value assets are based entirely on management's best estimation derived from mathematical models.

One investor group fears the advisory panel's advice will hinder movement toward fair value accounting by FASB, which sets accounting rules that the SEC recognizes.

"I'm concerned that this would tie the hands of the accounting standard setters," said Jeff Mahoney, general counsel with the Council of Institutional Investors, which represents public, union and corporate pension funds and was not involved with the report.

"Historically, the preparer community, corporations and in particular the banks have not supported fair value," he added.

The SEC panel is composed of executives from the accounting industry, money management business, rating agencies, and corporations.

The advisory group also proposed changes to circumstances in which companies are required to restate financial statements.

"The correction and disclosure of any accounting error should not automatically result in a financial restatement," the report reads. "... prior period financial statements should only be amended if the error would be material to investors making current investment decisions."

Mahoney said this proposal may make it hard for investors to review statements on an apples-to-apples basis.

But Grant Thornton's Nusbaum said companies will still disclose any errors, but that for nonmaterial items, it it costly and unnecessary.

"We had a time period where all of us were just restating ... just to be safe," he said. "The idea was to change it so that if we're restating something and it's not going to change an investor's decision... why go through the trouble?"

The SEC advisory group said that about 9 percent of public companies restated results in 2006 because of accounting errors, although the percentage is declining. (Editing by Tim Dobbyn)