SEC Recommendations on Mark-To-Market Accounting #3

While the Staff does not recommend a suspension of existing fair value standards, additional measures should be taken to improve the application and practice related to existing fair value requirements (particularly as they relate to both Level 2 and Level 3 estimates).

• Fair value requirements should be improved through development of application and best practices guidance for determining fair value in illiquid or inactive markets. This includes consideration of additional guidance regarding:
  - How to determine when markets become inactive
  - How to determine if a transaction or group of transactions is forced or distressed
  - How and when illiquidity should be considered in the valuation of an asset or liability, including whether additional disclosure is warranted
  - How the impact of a change in credit risk on the value of an asset or liability should be estimated
  - When observable market information should be supplemented with and / or reliance placed on unobservable information in the form of management estimates 
  - How to confirm that assumptions utilized are those that would be used by market participants and not just by a specific entity

• Existing disclosure and presentation requirements related to the effect of fair value in the financial statements should be enhanced.

• FASB [Financial Accounting Standards Board] should assess whether the incorporation of changes in credit risk in the measurement of liabilities provides useful information to investors, including whether sufficient transparency is provided.

• Educational efforts to reinforce the need for management judgment in the determination of fair value estimates are needed.

• FASB should consider implementing changes to its Valuation Resource Group.