Thursday morning, the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (CCMC) hosts a press call to discuss a new study, "Amortized Cost Is "Fair" for Money Market Funds," The paper "examines more than 30 years of accounting standard setting and Securities and Exchange Commission regulation to support the use of the stable value at which money market funds (MMFs) trade." Authored by Dennis Beresford, a former chairman of the Financial Accounting Standards Board, it "diffuses the argument that the long-standing use of a stable net asset value (NAV), an essential aspect of MMFs for investors, is simply "accounting fiction" and must be changed to a floating NAV <b:>`_." Beresford, who is the Ernst & Young Executive Professor of Accounting, J.M. Tull School of Accounting, University of Georgia, is joined by David Hirschmann, President and Chief Executive Officer, Center for Capital Markets Competitiveness; Senior Vice President, U.S. Chamber of Commerce. (In other recent news, see WSJ's "Low Yields May Force Money Funds to Get Creative".)
The "Key Points" of "Amortized Cost is Fair for Money Market Funds," include: Amortized cost to account for securities owned by money market mutual funds provides justification for the stable value at which funds trade. Far from "accounting fiction," amortized cost has been established through nearly 40 years of SEC regulation and accounting rule making to be generally accepted accounting principles (GAAP) by which these investments must be measured. Current accounting theory further supports amortized cost as GAAP for those investments."
A release discusses Amortized costs' "History" in the money fund space, explaining, "Accounting Series Release 219 (ASR 219) issued in May 1977 states that it is appropriate for money market funds to determine the fair value of debt portfolio securities on an amortized cost basis, provided the securities had remaining maturities of 60 days or less. SEC Rule 2a-7 issued July 1983, which was designed to limit the permissible portfolio of investments of a money market fund seeing to use either penny-rounding or amortized cost valuation to maintain a stable price per share, became GAAP for money market mutual funds. SEC amended 2a-7 in January 2010, substantially tightening the conditions under which amortized cost accounting was applied. October 2011 FASB Exposure Draft on Financial Services – Investment Companies concludes that because money market funds are managed to minimize differences between the carrying value and fair value of their investments that the use of amortized cost for reporting is akin to fair value."
The Chamber explains the "Reasons for Use of Amortized Cost Accounting." writing, "Money market funds are managed to minimize the difference between the carrying value and the fair value of their investments to maintain an constant net asset value. Underlying investments by money market funds are short term in nature, of very high quality, and generally held to maturity. If money market funds' market based net asset value deviates more than 1/2 of 1%, then it must either liquidate or pay out the excess as earnings, thus they will never suffer an impairment in value. Money market funds' amortized cost is the materially the same as fair value in nearly all cases. Securities owned by money market funds are considered GAAP as "cash and cash equivalents" if they were owned by a commercial entity. Money market funds are required to liquidate at the first sign of not being a going concern; thus, because money market funds are always going concerns, the use of amortized cost method is supported."
The paper's Summary explains, "Recent events have caused the U.S. Securities and Exchange Commission (SEC) to rethink the long-standing use of amortized cost by money market mutual funds in valuing their investments in securities. This practice supports the use of the stable net asset value (a "buck" a share) in trading shares in such funds. Some critics have challenged this accounting practice, arguing that it somehow misleads investors by obfuscating changes in value or implicitly guaranteeing a stable share price."
The intro explains, "This paper shows that the use of amortized cost by money market mutual funds is supported by more than 30 years of regulatory and accounting standard-setting consideration. In addition, its use has been significantly constrained through recent SEC actions that further ensure its appropriate use. Accounting standard setters have accepted this treatment as being in compliance with generally accepted accounting principles (GAAP). Finally, available data indicate that amortized cost does not differ materially from market value for investments industry wide. In short, amortized cost is "fair" for money market funds."
The paper concludes, "Accounting for investment securities by money market mutual funds appropriately remains based on amortized cost. The amortized cost method of accounting is supported by the very short-term duration, high quality, and hold-to-maturity nature of most of the investments held. The SEC's 2010 rule changes have considerably strengthened the conditions under which these policies are being applied. As a result of the 2010 SEC rule changes, funds now report the market value of each investment in a monthly schedule submitted to the SEC that is then made publicly available after 60 days. That provides additional information for investors. And the FASB's current thinking articulates this accounting treatment as GAAP."
