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Marking to market

What am I missing? There seems to be a great deal of unnecessary confusion about marking to market in the financial press. The rules state specifically that fair value is the sale value of an asset in an orderly market. It does not say that it is the liquidation value when markets are disorderly, as they are at present, or nonexistent in some cases. The FASB provides full guidance in SFAS 157 on what to do in these cases and it does not include writing assets down to zero. So, why all the criticism?

Peter J. Wallison, (“Judgment too important to be left to the accountants,” Financial Times, May 1, 2008) raises doubts about fair value measurement without ever telling his readers just what he understands by the term. SFAS 157 provides a wide range of possible ways of measuring fair value that contradicts the “one-size-fits-all” charge. He is right that a “wooden application of fair value” does a disservice to investors but that does not make an intelligent application a disservice, Does it make sense to write down a performing asset in a non-liquid market? Of course not, but the standard never suggested that it should. In particular, the standard attempts to arrive at an external measure of value in use if that is the highest and best use of that asset. Let’s be fair to the notion and use the notion correctly so that it becomes a good guide to the market.  For the full article see Wallison

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