Congress is considering whether to make major revisions to the fair-value accounting rules that have created so much controversy lately. Possible changes include suspending the rules, improving value-at-risk measurements and reinstating the uptick rule.

Money managers have argued that fair-value accounting, also known as mark-to-market for the way it prices assets at whatever level the market is at, is undercutting their business and forcing even strong companies to mark down billions of dollars of assets to fire-sale prices.

"Balance sheets are getting artificially hit when they should not be," Putnam Investments CEO Robert Reynolds told a group of bankers last Thursday.

"The suspension of mark-to-market accounting would really help the markets," he said, adding that some financial firms that have recently collapsed might still be in business if mark-to-market rules were less strict.

The Securities and Exchange Commission has said it won't suspend or eliminate the rules, but will instead look for ways to improve risk assessment, identify unrelated volatility and possibly give counterparties more time to weigh a security's true value.

SEC Chairman Mary Schapiro said "it is not our intention that these assets be written down to zero or to fire-sale prices."

She said she is pushing the Financial Accounting Standards Board to come up with new guidance that will make it easier for companies to determine what assets are worth. The FASB is expected to publish its guidance within three weeks.

On Tuesday, Federal Reserve Chairman Ben Bernanke told the Council on Foreign Relations that regulators should make improvements to some of the accounting rules, but said he was opposed to suspending mark-to-market accounting.

"We need to provide more guidance to financial institutions about what are reasonable ways to address the valuation of assets that are traded at all in highly problematic markets," Bernanke said. "We should look to identify the weak points of mark-to-market and try and make some improvements on a more expeditious basis."

But Treasury Secretary Timothy Geithner testified Thursday that some proposals to suspend mark-to-market accounting could erode the market's ability to assess risks at banks. "We're in a period where investors do not have a lot of confidence in their capacity to judge the risks," he said. "We have to be very careful not to do things that would erode confidence in people's ability to assess the risks."

Financial Accounting Statement 157 (FAS 157) defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Things are only worth what someone else is willing to pay you at the time you want to sell, but if the price is too low, people stop selling. There may be plenty of buyers when markets are extremely undervalued, but no one wants to sell at the bottom unless they have to.

"Price and value are intertwined," said Tony Aaron, a quality and risk management leader with Ernst & Young's transaction advisory services. When prices swing too far one direction, "people hold back and say it's not time to sell or it's not time to buy."

"This raises deep, philosophical questions about the nature of valuations," said Daniel Kahn, an executive director with Ernst & Young's transaction advisory services. Certainly, the market for subprime mortgage securities and other illiquid assets has frozen, making them very difficult to value.

"An asset is worth less because you can get less for it, or because it stays risky for a long period," Aaron said. "If these troubled mortgages are going to default, the reason for the write-downs will eventually come to fruition."

The uptick rule was adopted after the 1929 stock market crash, but was abolished by the SEC in 2007 after the agency determined it to be ineffective. The rule allowed short sales only when the last sale price was higher than the previous price.

"The Commission may conduct a public meeting as early as next month to consider whether to formally propose reinstatement of the uptick rule, or consider other measures related to short sales," said SEC spokesman John Nester.

Earlier this month, the London-based International Accounting Standards Board said it would alter its own mark-to-market rules to bring them more closely in line with U.S. standards. Companies using International Financial Reporting Standards will now have to report asset values using the three-level hierarchy the U.S. uses.

Under the hierarchy, Level 1 assets are the easiest to value and are based on a simple price quote. Level 2 assets are more of a mark-to-model estimate, based on observable prices and inputs. Illiquid, Level 3 assets base their value entirely on estimates and complicated mathematical models.

Mark-to-market accounting makes sense for instruments like mutual funds that are sold daily, but makes little sense for firms with a longer timeline, such as private equity investment firms, said Tom Goldstein, managing director and chief financial officer at Chicago-based Madison Dearborn Partners. Daily or even quarterly price fluctuations "don't provide meaningful information when the holding period is two to five years," Goldstein said.

He said there is a difference between the book value and market value of a security, and mark-to-market accounting is "irrelevant in a market like this because you wouldn't sell. FAS 157 is still a fairly new rule, and we're all learning this as we go," Goldstein said. "I hope to see more harmonization and a more unified approach in the future."

Many managers have come to accept fair-value accounting for what it is and doubt it will go away, recalling the old mantra: What doesn't kill you makes you stronger.

"We didn't like [Sarbanes-Oxley] at the time, but we're all better off for it," said James D'Arecca, executive director and assistant controller for Schering-Plough Corp.

"Having been through the storm, we'll be well-positioned to deal with anything that comes our way," Kahn said.

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