Under a direct threat of Congressional intervention, the Financial Accounting Standards Board and the Securities and Exchange Commission have promised to deliver guidance in three weeks on how to deliver market-based fair value measurements when markets are inactive.

FASB Chairman Robert Herz and SEC Acting Chief Accountant Jim Kroeker faced an irked subcommittee of the House Financial Services Committee in a hearing to hash out whether the use of fair value in corporate accounting has played a role in the current economic crisis. Rep. Paul Kanjorski (D-Pa.), chair of the Capital Markets Subcommittee, said in his opening remarks the focus of the hearing is getting the FASB and the SEC “to do the jobs they are required to do. Emergency situations require expeditious action, not academic treatises. They must act quickly.”

Acknowledging that accounting standard setting shouldn’t become a political process, Kanjorski said nevertheless he would convene a hearing after the Easter/Passover break to propose a legislative solution if FASB and the SEC have not finalized their promised guidance. FASB opened a project in mid-February—one of several intended to help improve application of fair value measurement rules—to give guidance on how fair value should be measured when markets are inactive. It would augment guidance the FASB and SEC issued in September reiterating that market prices alone should not dictate fair value measurement when buyers have disappeared.

In his prepared remarks, Herz acknowledged concerns about “procylicality”—that writing assets down to fair value during market inactivity leads to investor action that further drives down prices. “But I think few would suggest suspending or modifying the reporting to individual investors of the current values of their investment accounts,” he said. “Thus, to the extent there are valid concerns with procylicality, I believe these concerns are more effectively and appropriately addressed through regulatory mechanisms and via fiscal and monetary policy, than by trying to suppress or alter the financial information reported to investors and the capital markets.”

Thomas Bailey, president and CEO of Brentwood Bank in Pennsylvania testified on behalf of the Pennsylvania Association of Community Bankers and the Independent Community Bankers of America. He said the root of the current problem rests in the accounting rules around impairment. “Under U.S. GAAP, a company must evaluate its investment securities portfolio to determine whether fair value is lower than book value,” he said. “OTTI (other than temporary impairment) results when the collection of all contractual cash flows are not deemed probable.”

Bailey said some auditors have insisted on OTTI writedowns “simply because current market values were very depressed, even if the institution did not reasonably expect to lose any principal or interest.” That leads to a writedown to current fair value, however low that may be in the current market environment, “even if (the institution) intends to hold the investment security until recovery.”

FASB offered a clarification as to how entities should arrive at the OTTI determination in guidance finalized in January.