Lawrence Cunningham has interesting reflections on the proposed suspension of mark-to-market accounting rules here. Larry's post is worth reading in its entirety, but I particularly like this part:

Critics say that fair value accounting is a cause of the credit market crunch. Amid stressed market conditions, they say, the result of reporting steadily declining market prices for assets is relentless downward pressure on those prices. This exacerbates those conditions in a downward spiral. Proponents of fair value accounting note that accounting is simply measuring previous decisions; fair value accounting promotes transparency and utility that maintains capital adequacy by making capital conditions transparent.

Both stances are reasonable. What ultimately divides them is a broader question: whether accounting should seek a modest role of pure and impartial reporting or be designed as a public policy lever that consciously seeks to influence market behavior.

I would only add that I'm frustrated by the general failure of both sides to acknowledge one simple fact: valuation is hard. We expect accountants to operate under clear rules that tell us how much things are worth, but that's unfair. Most of us probably think our house is "worth" more than the market says it is right now, but thankfully most of us probably don't have to sell. Mark-to-market generally makes the most sense as a valuation approach, but what if the market's all out of whack and everyone agrees that only desperate sellers are selling, at prices far below normal? Are these the times that try one's sells? (OK, I know, I went too far there. I inherited a punning disorder from my dad).

In the SEC's words: "The results of disorderly transactions are not determinative when measuring fair value. The concept of a fair value measurement assumes an orderly transaction between market participants. An orderly transaction is one that involves market participants that are willing to transact and allows for adequate exposure to the market. Distressed or forced liquidation sales are not orderly transactions, and thus the fact that a transaction is distressed or forced should be considered when weighing the available evidence. Determining whether a particular transaction is forced or disorderly requires judgment."

Still, as commenter Broc Romanek points out, accountants don't like the idea.

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