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October 1, 2008 - The Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) announced that they will provide additional guidance on the application of fair value accounting.
Currently, credit unions and other financial institutions holding mortgage-backed securities value them using the fair market accounting rule. Many of these securities have no value, making their fair market value zero.
FASB issued a press release late yesterday that its October 1 FASB meeting agenda would address a goal of providing additional guidance on fair value accounting. The guidance will be consistent with Fair Accounting Standard (FAS) 157 regarding the valuation of assets when markets have become inactive.
This change should benefit credit unions and other financial institutions holding mortgage-backed debt by permitting them to use the fair value method to value these securities. A release by the SEC and FASB indicates that when an active market for a security does not exist, it is acceptable to use management estimates that incorporate current market participant expectations of future cash flows and include appropriate risk premiums. To access a Q&A from FASB and the SEC, please follow this link: http://www.sec.gov/news/press/2008/2008-234.htm.
Using the fair value method should increase the value of these securities on a credit union’s balance sheet, ultimately increasing equity.
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