While Congress regroups on a federal bailout plan, regulators are answering urgent demands for interpretive guidance on fair value measurement, issuing views the banking sector so far is cheering. The Securities and Exchange Commission and the Financial Accounting Standards Board issued a joint four-page Q&A late Tuesday that offers its views on how to value assets where market activity has frozen; FASB also plans to fast-track more formal staff guidance to elaborate. They’re answering urgent demands for how to interpret the requirements of Financial Accounting Statement No. 157 Fair Value Measurements as they pertain to the evaporation of market activity for specific assets.

The joint SEC/FASB guidance says management’s internal assumptions, such as expected cash flow, can be used to measure fair value when market evidence has disappeared. “Statement 157 discusses a range of information and valuation techniques that a reasonable preparer might use to estimate fair value when relevant market data may be unavailable, which may be the case during this period of market uncertainty,” the guidance says. “In some cases using unobservable input might be more appropriate than using observable inputs ... In some cases, multiple inputs from different sources may collectively provide the best evidence of fair value.”

The American Bankers Association, which called on the SEC to provide guidance by Sept. 30 so it could be applied to third-quarter reporting, fired off a kind of thank-you statement soon after SEC and FASB published their Q&A. “More and more of our members in recent weeks have raised concerns that a number of accounting firms were mistakenly interpreting SFAS 157 in a way that required marking assets to fire sale values,” said ABA President Edward Yingling in a written statement. “This guidance will help auditors more accurately price assets that are difficult to value under current market conditions. The SEC’s action will give preparers and auditors of financial statements a better understanding of the accounting literature as they prepare third-quarter reports.”

In a FASB meeting this morning, board members approved the publishing of a proposed staff position, which will be available for public comment for only seven days. Board members said the guidance will elaborate on yesterday’s Q&A with an example of how to apply FAS 157 when there’s no market activity.

FASB says its proposed guidance will illustrate several key principles of FAS 157, including the notion that an income approach based on internal assumptions about market participant expectations may be more representative of fair value when there’s no market activity. The guidance also will say that the fair value measurement still must focus on an exit price from the perspective of a market participant and that broker quotes or pricing services are not fully determinative of fair value if a market is inactive, therefore less reflective of fair value when they do not reflect the result of market transactions.