Observations on Fair Value Accounting (cont.)

Ben Bernanke, chairman of the Federal Reserve System Board of Governors, testified in a hearing of the House Financial Services Committee on monetary policy and the state of the economy on February 25, 2009. During that hearing, Chairman Bernanke was asked to discuss the pros and cons of suspending mark-to-market accounting. Chairman Bernanke responded that “…the basic idea of mark to market accounting is very attractive, the idea that wherever there are market values determined in free exchange, that those market values should be used in valuing assets so that investors would have a more accurate sense of what the institution is worth. So that’s the principle and it’s a good principle in general.”

Mr. Bernanke noted that difficulties with mark-to-market accounting arise when markets become illiquid or do not function. And, he stated, “So some real challenges there and I think the accounting authorities have a great deal of work to do to try to figure out how to deal with some of these assets, which are not traded in liquid markets. But I don’t see a suspension of the whole system as being constructive because there is a great deal of information in valuing many of these assets according to market principles.”
 
As the SEC concluded in its report to Congress, suspending or eliminating the current fair value accounting requirements would diminish the quality and transparency of reporting and could adversely affect investors’ confidence in the markets. In turn, this loss of confidence could also cause downward pressure on the financial markets and the economy and additional financial instability.