Oct. 15 (Bloomberg) -- The U.S. Securities and Exchange Commission agreed to back an effort by banks that may let them delay writedowns on a type of security that has declined in value during the collapse of the credit markets.

Banks in limited cases may account for so-called perpetual preferred securities as debt, letting them wait to write down their value, SEC Chief Accountant Conrad Hewitt wrote yesterday to Financial Accounting Standards Board Chairman Robert Herz. Hewitt's interpretation can be used immediately in valuing the securities, which are issued without maturity dates.

``This is really good news,'' Donna Fisher, senior vice president for tax and accounting at the American Bankers Association, said in an interview. ``We are making some headway. The SEC is recognizing that there are problems in the rules.''

The SEC's interpretation may help resolve a debate over accounting for the securities, part of a broader discussion on valuing hard-to-sell assets. Auditors say the securities should be treated as equity and banks sought to count them as debt. Banks can apply debt rules ``if there has been no evidence of deterioration in the credit of the issuer,'' such as a drop in cash flow or ratings cut below investment grade, Hewitt wrote.

SEC spokesman John Nester declined to comment beyond the content of the letter.

Hewitt wrote that the SEC's interpretation is an ``intermediate step'' until FASB can sort out the accounting treatment of perpetual preferred securities.

Letter Debate

The Washington-based ABA argued in a Sept. 11 letter to the SEC that perpetual preferred stock should be treated as debt because most of the returns on the investments come from dividend payments tied to the London interbank offered rate and credit-rating companies grade the securities in the same way they rank bonds.

The Center for Audit Quality, which represents accountants, said in a letter seven days later that perpetual preferred securities should be treated as equity because the holdings do not have a maturity date and ``the investor cannot recover its investment simply by holding the investment.''

Warren Buffett's Berkshire Hathaway Inc. bought $5 billion of Goldman Sachs Group Inc. perpetual preferred stock last month. Goldman can buy back the shares at any time and Berkshire gets a 10 percent dividend.

The debate about perpetual preferred securities is one of several that banks and auditors are waging on so-called fair- value rules, which require companies to assess their investments each quarter and report losses when the values decline.

Fair-Value Discussions

Lawmakers say the provision has exacerbated the credit crisis by forcing banks to write down to fire-sale prices assets they have no intention of selling. On Oct. 12, Citigroup Inc. Senior Vice Chairman William Rhodes and Deutsche Bank AG Chief Executive Officer Josef Ackermann, speaking for the Institute of International Finance, said fair-value needs a review. Fair- value advocates, including FASB, say the rule adds transparency, giving investors more information about companies.

As part of a $700 billion package the U.S. Congress passed this month letting the Treasury buy mortgage securities and stakes in banks, the SEC must study the impact fair-value has on financial institutions. FASB agreed Oct. 10 to offer companies guidance on valuing assets in inactive markets, without changing the current rule.

To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net.

Last Updated: October 15, 2008 17:13 EDT