Observations on Fair Value Accounting (cont.)

Companies’ ability to manipulate their reported net income may be more limited when amounts are reported at fair value on a regular or ongoing basis, because changes in the values of assets and liabilities are reported in the period they occur, not when they are realized as the result of transactions.

During the savings and loan crisis, there was considerable criticism of the practice of gains trading, under which institutions would “cherry pick” appreciated securities for sale thereby boosting reported earnings, while in accordance with regulatory accounting requirements not recognizing the unrealized losses on other securities they were holding.

Gains and losses resulting from changes in fair value estimates reflect economic and market events that companies and investors may find relevant to their decisions. Thus, fair value accounting has helped investors and capital markets more quickly identify where problems exist and react to those problems.

The Center for Audit Quality, the Council of Institutional Investors, and CFA Institute issued the following joint statement on October 1, 2008:

Suspending fair value accounting during these challenging economic times would deprive investors of critical financial information when it is needed most. Fair value accounting with robust disclosures provides more accurate, timely, and comparable information to investors than amounts that would have been reported under other alternative accounting approaches. Investors have a right to know the current value of an investment, even if the investment is falling short of past or future expectations.

In its recent report to Congress, the SEC reported that investors have repeatedly told the Commission that fair value information is vital in times of stress and that suspending the fair value information would weaken investor confidence and result in further capital market instability.