WASHINGTON, March 14 (Reuters) - The U.S. Securities and Exchange Commission is crafting tips for Wall Street firms that use “fair value” accounting methods to value hard-to-price assets such as mortgage-backed securities.
“The end of the quarter is the appropriate time to remind companies of their obligations to discuss their reliance on estimates so investors can better understand them,” SEC spokesman John Nester said on Friday.
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.
Critics say fair value accounting has exaggerated write-downs related to the fallout of the subprime mortgage industry and are calling on regulators to change the rule.
However, the Public Company Accounting Oversight Board, which polices corporate auditors, has rejected the idea of modifying the fair value accounting methods.
The letter the SEC is drafting will remind companies that if they are relying on fair value accounting that they should disclose how they achieved their numbers. The agency is aiming to send the letter out by the end of the first quarter.
Late last year, the SEC issued a similar letter to about two dozen large banks, investment banks and insurance companies, urging them to disclose their risks linked to the subprime credit market.
Citigroup C.N, Bear Stearns BSC.N and Merrill Lynch MER.N are some of the firms that have been forced to write down billions of dollars in mortgage related losses. (Reporting by Rachelle Younglai; Editing by Tim Dobbyn)
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