Financial Markets Rescue Package Q&A: Mark-to-Market Accounting (7 of 10)

The federal government's Troubled Asset Relief Program (TARP)—created by the Emergency Economic Stabilization Act of 2008 (EESA) signed into law by President Bush on October 3, 2008—gives the U.S. Department of the Treasury authority to purchase "troubled assets" from financial institutions. The Faegre & Benson TARP Task Force has developed answers to some frequently asked questions about which institutions qualify to participate in the program and how the program is expected to work.

How does the legislation affect mark-to-market accounting?

Q: Will mark-to-market accounting be suspended? Can it be retroactive?

A: The EESA affirms that the SEC has the authority to suspend mark-to-market accounting. (§ 132(a).) The EESA does not address whether that suspension could be retroactive. The EESA also requires the SEC, in consultation with the Federal Reserve Board and the Treasury Secretary, to conduct a study on mark-to-market accounting and the advisability and feasibility of modifying the accounting standards. (§ 133(a).) This report is due to Congress within 90 days after the EESA is enacted. (§ 133(b).)

On September 30, 2008, the SEC and FASB issued joint guidance regarding Statement 157. The guidance does not suspend Statement 157, but it does seek to provide companies and their accountants with added flexibility in making fair value determinations under Statement 157 in the current market environment. Among other things, it clarifies that (1) management may consider internal assumptions (e.g., expected cash flows) in making fair value determinations when relevant market evidence is not present, (2) broker quotes are not necessarily determinative of fair value when an active market does not exist, (3) the results of disorderly transactions are not determinative of fair value and (4) while transactions in inactive markets may be input when measuring fair value, they are likely not determinative. The FASB is also considering the issuance of a new staff position to illustrate key principles for determining fair value in a market that is not active.