Fair value guidance may be needed: SEC official

By Rachelle Younglai

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission may need to issue guidance on "fair value accounting" methods, which are used for the hardest-to-value assets such as mortgage-backed securities, SEC Commissioner Paul Atkins said on Thursday.

Fair value accounting is a way of accounting for assets and liabilities based on how much they are currently worth as opposed to using historical values.

But now that the credit markets have seized up, fair value accounting has been blamed for exacerbating the credit crisis by forcing companies to use complex methods to value assets where there is little trading to identify market prices.

"If you have no value for something because there are no market values to be reflected, then you have to ask whether or not that is truly reflective of what the asset is worth," Atkins told Reuters in an interview.

"I think we need to come out with guidance to help people deal with that situation," he said.

In the past few months, corporate managers and some investors have been questioning the use of fair value accounting methods for hard-to-price asset-backed securities.

Under U.S. accounting rules, assets can be valued based on a simple price quote in an active market. The hardest to value assets are based entirely on management's best estimation derived from mathematical models, also known as "unobservable inputs."

Fair value accounting, also known as "mark-to-market" accounting, often requires companies to use complex mathematical models to come up with values, that some say adds to confusion.

Proponents of the accounting method have said better disclosures about how companies come up with their figures could help alleviate concerns.

"Something is clearly not worth zero. It's worth something, so what do you benchmark it to? Between us and the accounting firms and the investment banks... we need to come up with some good guidance for people," Atkins said.

Atkins would not say how quickly the guidance had to be issued, but said: "We have to keep our ears open to the market place."

"If we need to formulate more guidance sooner than later, than we have to be ready to do that," he said.

Late in March, the SEC asked about 30 companies to consider disclosing more information on how they value their hardest-to-price assets.

(Reporting by Rachelle Younglai; editing by Carol Bishopric)