Wednesday, March 25, 2009

SEC’s Kroeker, Pleased With FASB Response, Tells Congress Swift Action Must Be Taken on Fair Value, OTTI, For 1Q

Testifying at a House Financial Services Committee hearing earlier today, the Securities and Exchange Commission’s Acting Chief Accountant, Jim Kroeker noted his support for FASB’s recent action to propose further guidance on fair value accounting, and on other-than-temporary impairment (OTTI). FASB seeks comment on those proposals by April 1.

Some highlights from Kroeker’s written testimony :

Two weeks ago, on March 12, this Committee's Subcommittee on Capital Markets,
Insurance, and Government Sponsored Enterprises held a hearing on the critical
topic of fair value accounting, at which I also testified. I believe that the hearing helped to further crystallize and advance the objective sought by market
participants for improved guidance on the measurement of fair value and
accounting for impairments.

There can be no doubt, and we at the Commission fully understand, the gravity and urgency of these issues as we all work in the public interest to address the global economic crisis. The hearing on March 12 underscored our own efforts for swift consideration and appropriate action, including action to address and, as appropriate, implement the critical recommendations the Commission staff identified in our Congressional study on mark-to-market accounting, which we conducted in consultation with the Department of the Treasury and the Federal Reserve.

Consistent with the sentiments we have clearly heard from many members of this Committee, I believe swift action must be taken to address the accounting for investment impairments and to improve the measurement guidance for illiquid assets for first quarter 2009 reporting. We are therefore pleased that the FASB has acted diligently and responsively to use their expertise as an independent standard-setter and expose amendments to the measurement of securities in inactive markets and the recognition of "other-than-temporary" security impairments. Following the FASB due process procedures, the proposed amendments were deliberated fully at an open public meeting of the full Board, were approved by a majority vote, and are now subject to public comment. On March 17, the FASB's amendments were made available for a 15-day public comment period ending April 1.

Kroeker later added:
While the Commission has broad authority and responsibility to prescribe
accounting standards, it has long relied on the FASB as a private sector
standard-setter and recognized the importance of the FASB’s independence. The
FASB, in turn, is obliged to consider, in adopting accounting principles, the
need to keep standards current in order to reflect emerging accounting issues
and changing business practices. I am hopeful that the FASB will continue, on a
timely basis, to enhance the tools available to assist preparers and auditors
when making these difficult judgments. As I testified on March 12, as the
principal advisor to the Commission on accounting and auditing issues, I and my
office remain ready to assist the Commission in any way it deems necessary.

GAAP-RAP Differences and Regulatory Capital
[Note: the term GAAP-RAP differences is commonly used to describe differences between regulatory accounting principles vs. GAAP; in this case it is not so much a different set of regulatory accounting principles per se, but special adjustments from GAAP to arrive at regulatory capital.]

Kroeker explained in his testimony that while “Section 121 of FDICIA requires that the accounting principles used in the reports and statements filed with banking regulators by insured depository institutions be no less stringent than U.S. GAAP… There are, however, instances in which the prudential banking regulators have determined that adjustments should be made to U.S. GAAP accounting results for regulatory capital purposes, thereby reflecting the important differences between the objectives of U.S. GAAP reporting and the objectives of regulatory capital requirements.” He added, “We understand that these adjustments are intended to reflect the solvency and safety and soundness of the financial institutions on an ongoing basis. This can be done, for instance, by seeking to limit volatility that is temporary in nature.” He then described various examples of where banking regulators back out, or add back certain items from bank capital as reported under GAAP, for purposes of determining regulatory capital.

In various prior hearings (SEC, FASB, FASB-IASB Financial Crisis Advisory Group, and previous Congressional hearings), some have called for increased action by banking regulators - if the regulators are uncomfortable with the impact on bank capital of fair value accounting under existing GAAP - rather than asking GAAP to change to meet regulators' needs. Others, however - particularly former banking regulators like former FDIC chairman William Isaac - have countered that trying to adjust out the impact of fair value or OTTI from regulatory capital would have a limited impact, since investors, depositors, and others (including short sellers) react to the reported GAAP numbers, not the adjusted regulatory capital numbers.

Additionally, some FASB board members - at FASB's March 16 board meeting - expressed a desire to issue guidance that would be responsive to concerns voiced by members of Congress and banks, [which were also identified in the SEC's Dec. 30 report to Congress on mark-to-market accounting] and at the same time help preparers and auditors arrive at more meaningful and reasonable fair value numbers.

Others testifying at the House Financial Services (HFS) Committee hearing today included bank regulators, and banking and business representatives.

Next up: tomorrow (Thursday, March 26), U.S. Treasury Secretary Tim Geithner is set to testify before the HFS Committee at a hearing on: Addressing the Need for Comprehensive Regulatory Reform.

Credit Rating Agency Roundtable Panelists, Sr. Staff Announced; Child Care Center Wins Award
Yesterday, the SEC announced the panelists for its April 15 roundtable on oversight of credit rating agencies.

The SEC also recently announced a number of appointments to the senior staff, including Didem A. Nisanci as Chief of Staff, and Julie Zelman Davis as Deputy Director of Legislative Affairs. Nisanci was formerly staff director for the U.S. Senate Banking Subcommittee on Securities, Insurance, and Investment, and Davis was formerly on the staff of Sen. Carl Levin (D-MI)

Earlier today, the SEC announced that the child development center at its Washington, D.C., headquarters, The Harbor at Station Place, has been awarded a Gold-level Leadership in Energy and Environment Design (LEED®) designation by the U.S. Green Building Council (USGBC).

According to SEC spokesman John Heine, The Harbor at Station Place, together with Bright Horizons (a national sponsor of educational centers which is contracted to provide the daily operations and management at The Harbor at Station Place) is in the process of becoming NAEYC accredited. He added The Harbor at Station Place takes registrations from the general public, but gives preference in any openings to SEC employees and federal government employees. For further information on The Harbor at Station Place, call 202-408-9271.

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