Tuesday, April 29, 2008

Subprime, Credit Crisis Update; SEC Chief Accountant, FASB, PCAOB Chairs At Baruch Zicklin Financial Reporting Conf. May 1

In our continuing coverage of subprime crisis and related market turmoil particularly with respect to related accounting and auditing standards, here are some recent items of interest:

Defining the Credit Crisis in Vinny Catalano’s blog today provides definitions of some of the key terms in the alphabet soup of the credit crisis.

What’s Wrong with Subprime Accounting by Marie Leone in CFO.com today. Leone covers in depth FASB, IASB and other commentary on matters relating to FAS 157, Fair Value Measurement, FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FIN 46R, Consolidation of Variable Interest Entities. (See some of our related coverage further below.)

How to Revive Securitization Markets, op ed by Robert Pozen, Chair, MFS Financial, in today’s Wall Street Journal. Authoring the op ed in his personal capacity, Pozen hints that the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR), which he chairs, may consider recommendations relating to securitization accounting and disclosure at its meeting Friday, May 2nd.

Pozen describes new accounting rules promulgated by FASB in the post-Enron period (FIN 46R and FAS 140), but states, “Unfortunately those rules set the stage for today's liquidity crisis.” He explains that transactions were structured to fall below bright lines in the standards (like 10% voting equity in the securitization trust to consolidate) or to avoid triggering certain disclosure requirements.

Observing that, “Most markets for securitized debt have dried up. The cause is uncertainty: Since no one knows exactly who owns the potential losses from securitized mortgages, many investors stay away,” Pozen posits, “When [[CIFiR] meets on Friday, it can take a big step toward reviving this critical part of our financial market. It should recommend that the regulators require someone to "own" the securitization process as well as require more disclosures about who will bear the losses from the assets underlying these securities.”

Pozen proposes a three part solution: “First, FASB should again revise its rules to allow a sponsor to keep a trust off its balance sheet only if an independent party has sufficient voting equity to fund the trust's normal operations – presumptively at least 10% – and that party has a substantial role in the governance of the trust. Second, this large holder of the trust's voting equity should have the right to select a rating agency for the trust and negotiate a fee arrangement with the agency.” He adds, “Third, the FASB and the SEC should be more specific about the disclosure requirements of trust sponsors with formal or informal obligations to buy up the trust's unsold debt securities, especially if the long-term assets of the trust are mismatched with its short-term liabilities.”

Speech by IASB Chairman Sir David Tweedie in Canada on April 21. Tweedie said: “Time is too short to provide a thorough analysis of the current credit crisis, but it is evident that at the heart of the crisis were bad lending practices. Bad lending was then compounded by the absence of prices in the secondary markets for some structured credit products and concerns about the location and size of potential losses. This in turn led to funding difficulties caused by the reluctance to extend credit to a number of financial institutions thought to hold low-quality liquid assets.” He added, “Financial reporting enters the scene by way of its requirements to value these assets and to alert the markets to risks associated with their existence…. It is undoubtedly difficult to value complex, illiquid, structured credit securities… My personal view is that showing the changes in values of these securities, even if imperfect, provides much needed transparency and enables markets to adjust in a necessary, even if painful manner.”

Tweedie noted, “None of this is to say that the existing IFRSs are perfect, and clearly the IASB is willing to examine how to improve its standards in light of developments.” He referenced the recent recommendations by the G-7 Finance Ministers, endorsing a report of the Financial Stability Forum, that the IASB and other relevant standard-setters take certain actions “within 100 days” relating to, among other matters, fair value accounting and off-balance sheet issues. See our related post on the G-7 here.

2011 emerges as a key date in the continued move of worldwide adoption of IFRS. Tweedie noted over 100 countries are on IFRS now, and said “nearly 150 countries” will have adopted IFRS by 2011. Regarding the timetable for convergence projects under the FASB and IASB’s Memorandum of Understanding (MOU), he said, “My best estimate is that these MoU projects will be completed in 2011.”

With regard to the U.S., Tweedie said, “[W]e are waiting for the SEC to determine whether US companies will have the option to use IFRSs or whether a firm deadline for US adoption will be set. “ He added, “there is reason to believe that IFRSs will be adopted in the United States by US companies in the near future.”

Learn More About IFRS and SEC's Upcoming Roadmap
Learn more about IFRS and the status of SEC’s ‘roadmap’ to consider potentially permitting – or requiring – U.S. companies to file in IFRS – at Financial Executives International's (FEI’s) June 5 conference: “The World Is Moving to IFRS – Are You?” A keynote address will be provided by SEC Corp Fin Director John White. Space is limited, speakers, agenda and registration information can be found at www.financialexecutives.org/ifrs. BNA Tax & Accounting is the exclusive sponsor of the conference.

Additionally, the New York State Society of CPA’s Manhattan/Bronx Chapter has a two hour CPE session on “IFRS and U.S. GAAP Convergence” May 13 from 6-8 pm at New York Life, midtown Manhattan.

As previously noted in this blog, the FAF and FASB are holding a conference (which will be webcast) at Baruch College on June 16, “High-Quality Global Accounting Standards: Issues and Implications for U.S. Financial Reporting.” Here are the questions that will be addressed at that conference.

Subprime May Come Up At Baruch – Zicklin Center Financial Reporting Conference May 1
Although not outlined as a separate panel, the subject of subprime and the credit crisis may come up at Baruch College’s Zicklin Center for Corporate Integrity Financial Reporting Conference on May 1. This is one of the major conferences on the financial reporting circuit each year. Speakers include SEC Chief Accountant Conrad Hewitt, FASB Chairman Robert Herz, PCAOB Chairman Mark Olson, and other experts. FEI President and CEO Michael P. Cangemi will appear on a panel on “Current Developments in the Private Sector.” FEI member Bob Laux, Director of Financial Accounting and Reporting, Microsoft, Inc., is appearing on a panel on, “Getting Ready for International Accounting Standards in the U.S.”

FEI Coverage of Subprime/Credit Crisis
If you’re new to our blog, here are a few links to some of our past coverage of the subprime/credit crisis:

SEC, Legislative Response to Market Turmoil (NYT's Norris); Rutgers Conference on Credit Crisis; European Parliament on IASB (April 25, 2008)

G-7, Endorsing FSF Report, Asks IASB, Other Standard-Setters Take Action Within 100 Days on Off-Balance Sheet, Valuation (April 12, 2008)

IMF, IIF Rec's on Market Turmoil Are Far-Reaching, Include Fair Value, Off-Balance Sheet;
Q&A With Michael Young, Willkie Farr (April 11, 2008)

FASB Votes To Remove QSPE Concept From FAS 140, FIN 46R (April 3)

Treasury Blueprint Today; Pres. Bush Announces Intent to Nominate Aguilar, Walter to SEC;
SEC Letter on Disclosure of FV Info (March 31)

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1 comment:

About Health Blog said...

He explains that transactions were structured to fall below bright lines in the standards or to avoid triggering certain disclosure requirements.