A new chapter in the controversy over fair value measurements: the controversy surrounding FAS 157, Fair Value Measurements, may be far from over. Following the release of the fair value guidance, FASB is being lauded by some and criticized by others for allegedly failing to follow due process and for "easing" the fair value rules.

• Position: Issue UPDATE

The accounting standard became the center of debate when valuation methods that work in typical markets were challenged for unintended consequences in illiquid or irregular markets. Some say these consequences partially caused the recent market failures. While many criticize the long-term cost of viewing accounting rules as a short-term fiscal policy tool, the rule makers are not immune to economic realities. The controversy culminated in a Congressional hearing and mandate to "get this resolved."

THE ROAD TO THE CONGRESSIONAL "MANDATE"

Proponents for relaxing FAS 157 in irrational markets allege that forcing financial institutions to recognize assets without active markets at "fire sale" prices do not reflect economic reality and was an impetus for the mortgage meltdown and the ensuing recession. In fall 2008, the ABA demanded that the SEC override FASB's guidance on fair value "and replace it with guidance that clarifies that fair value in an illiquid market does not include forced or distressed sales."

In January, the SEC delivered its Congressionally-mandated fair value report to Congress, recommending improvements to the fair value accounting standard including development of additional guidance for determining fair value of investments in inactive markets.

Following the SEC's recommendations, FASB added new projects to provide additional guidance for determining fair values and disclosure estimates, specifically to:

* Determine when a market for an asset or a liability is active or inactive

* Determine when a transaction is distressed

* Apply fair value to interests in alternative investments

FASB originally anticipated releasing the guidance this June.

Plans changed in late February when Congress got involved. The House Financial Services Committee scheduled a hearing to examine the mark-to-market accounting rules. The same committee also introduced legislation to create a new body to police the application of accounting standards--the Federal Accounting Oversight Board (FAOB).

Rep. Paul E. Kanjorski (D-Penn.) chair of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, said, "we will seek to engage in a constructive, thoughtful conversation with a diverse range of viewpoints aimed at identifying fair-minded, incremental and achievable fixes."

The hearing did not resemble constructive dialogue as both Republican and Democratic committee members severely criticized FASB and the...