The market for auction rate securities has been seized up for months, but ARS holders continue to paint very different pictures about the value and long-term prospects for their securities, according to an analysis of 600 public company filings.

Joseph Floyd, head of financial consulting for the Huron Group, recently pored over the auction rate disclosures looking for patterns. It’s not as if the valuations and disclosures are non-compliant, he says—the rules allow for acceptable inconsistency in reporting. Instead, says Floyd, “The burden of understanding that inconsistency is placed on the user of the financial statements.”

The market for auction rate securities sputtered to a halt in February when auction failures left holders unable to sell what they intended to be short-term investments. Auction rate securities are debt instruments with long-term maturities, though investors traded them as short-term liquid investments via the auction process until a wave of mortgage failures led to widespread problems in credit markets.

In many cases the underlying debt instruments were sound. The auction seizure and resulting loss of short-term liquidity, however, created a host of financial reporting quandaries. Floyd says the dynamics create an interesting opportunity to study how companies interpret and comply with financial reporting rules and how meaningful the resulting disclosures are for investors.

Of the 600 filings Huron studied, 90 percent disclosed some measure of auction rate holdings in the first quarter. Of that number, 53 percent reported the securities were temporarily “impaired” (or the fair value was less than the amortized cost basis) with no effect on earnings, while 32 percent reported no impairment of any kind. Only 10 percent reported the impairment as something other than temporary, meaning it could linger or be permanent, with a charge to earnings.

For securities backed by collateralized debt obligations, Huron found the average impairment, or write-down in fair value, was 20 percent. For municipal bonds, the average impairment was only 5 percent. Of companies reporting balance sheet classifications for their auction rate securities, 41 percent changed the classification from short term to long term in the first quarter of 2008.

The diversity in valuations and disclosures isn’t entirely surprising, Floyd says, given the latitude provided in the accounting rules for management to reach widely varying conclusions about their holdings. He’s referring to Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities. “Accountants don’t like when we say this, but we have acceptable inconsistency because of the way the rules are written,” he says. “Companies can have the same investment but can have different treatment of it.”

Huron’s report picks apart some of the disclosures to highlight those that are helpful to investors and those that are more obscure, Floyd says. “We found some disclosures you just couldn’t interpret,” he says. “We couldn’t figure them out—either because they were lacking in details or they were nonsensical—making it difficult to really understand what was going on.”

Related Coverage: Cos. Face Auction Rate Insecurities (May 13, 2008)