Does the SEC ‘back-test’ fair value measurements?

BVWireIssue #89-2
February 10, 2010

"Fair value is here to stay," said James Kroeker, SEC Chief Accountant, during the opening day of the SEC Speaks conference in Washington, D.C. last week. (In an unprecedented move, day 2 was cancelled due to the winter storm that devastated the area).

But, FEI Financial Reporting Blog reports that former Commissioner Cynthia Glassman asked if the SEC has “back-tested” fair value amounts, i.e., "what they ultimately turned out to be worth, to see if it is an appropriate measure going forward.” Kroeker replied “that is something the Division of Corporation Finance considers in terms of its disclosure rules, what entities are doing to ‘backtest,’ if you will, fair value.” The objective is not one of using hindsight, he added, or “calling into question judgments reached” as of an earlier date. If an entity later sells the asset but the amount at which it is sold differs from the estimate, “that doesn’t immediately call into question the estimate.”

Values are constantly changing; but that does not automatically mean [the estimate was] wrong,” added Wayne Carnall from the SEC Division of Corporation Finance.  However, if the agency sees something “unusual,” Carnall added, it will ask “lots of questions” about compliance with FAS 157, and it the fair value measurements look “contrary to market expectations, we will certainly ask questions in that regard.”

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