SEC and FASB Guide on Fair Value Accounting under FAS 157

As the market crisis continues, the SEC and FASB have issued joint guidance on the fair valuation of illiquid securities under FAS 157. Some commenters have said that the mark to market accounting demanded by FAS 157 contributed to the crisis. Many of the illiquid mortgage-backed securities that are to be purchased by the federal government are FAS 157 level three securities with no active markets.

The SEC and FASB sat that managers may use internal assumptions, such as expected cash flow, to measure fair value when an active market for a security does not exist. Managers can use estimates that incorporate current market participant expectations of future cash flows and appropriate risk premiums.