U.S. SEC advisory group seeks fair value restraint

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.

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.

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

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 panel's advice will hinder movement toward fair value accounting by the Financial Accounting Standards Board (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, and was chaired by Robert Pozen, chairman of MFS Investment Management.

As credit markets have been squeezed, fair value accounting has been blamed for contributing to the credit crisis by reinforcing a downward spiral in asset prices.

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."

The Council of Institutional Investors' 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.