Thursday, February 26, 2009

CFO Views on ARRA, Fin. Stability Plan

Yesterday, FEI released updated survey results on the FEI Survey on U.S. Treasury Department's Financial Stability Plan. This relates to the Financial Stability Plan outlined by Treasury Secretary Tim Geithner on February 10 (see FEI summary).

The updated survey results include close to 150 responses from FEI's membership, which includes over 15,000 senior financial executives. (We released preliminary results on Feb. 13 which included 100 responses; the updated results have not changed significantly from the preliminary results.) Some highlights from the updated results released yesterday (note: we abbreviate Financial Stability Plan as FSP below):
  • 15% believe the FSP will help their company
  • 28% believe the FSP will help the economy
  • 15% believe the FSP will make credit more readily available
Asked why they do not believe credit will be more readily available, respondents indicated their agreement with these potential reasons, said 'don't know,' or responded 'other' as follows:
  • 15% "No, because of hard to value troubled assets"
  • 7% "No, because of fair value/mark-to-market accounting"
  • 37% "No, because of a combination of the above" [i.e. a combination of hard to trouble assets, and the fair value/mark-to-market rules]
  • 13% Don't know [i.e., don't know if it will or will not make credit more available]
  • 13% Other (see narrative responses for 'other')

Separately, another organization, published the results of a small survey it conducted for anecdotal evidence on CFO views on the American Recovery and Reinvestment Act of 2009 (ARRA), the $787 billion economic stimulus plan. Read more in the article by Kate Plourd and Sarah Johnson published in yesterday, Cheered by Obama Talk, CFOs Still Fret Lack of Detail. If you received this blog post from 'a friend' and would like to subscribe to our blog, send an email to and write in subject line: Sign Up.

FASB, SEC Update

BNA's Daily Report for Executives has some excellent coverage of yesterday's FASB board meeting in these articles:

FASB Finalizing Guidance on Accounting For Contingent Items in Combinations, by Denise Lugo

FASB to Float Revised Proposal on HowTo Gauge Liabilities Under Fair Value Rules, by Steve Burkholder, and

FASB to Issue Exposure Draft On GAAP Codification in March, by Denise Lugo

(Another matter discussed at yesterday's FASB meeting was the Insurance project, a joint project with the IASB.)

For the official readout from the meeting, see FASB's Summary of Board Decisions for Feb. 25 meeting.

SEC Corp Fin Staff Guidance on 'Say-on-Pay' Provisions in ARRA
Broc Romanek of blog reported yesterday that SEC Corp Fin staff issued new guidance late on Feb. 24 pertaining to the 'say on pay' provisions in the American Recovery and Reinvestment Act of 2009, in his post entitled: Corp Fin Issues "Say-on-Pay" Guidance: Slim Pickings. See on SEC website: Corp Fin Staff Q&As on American Recovery and Reinvestment Act of 2009.

See also Yin Wilczek's article in today's BNA: SEC Issues Guidance on Say-on-Pay Law; More Interpretations Needed, Attorney Says. Wilczek notes: "The Securities and Exchange Commission's Division of Corporation Finance Feb. 24 issued interpretations to the say-on-pay provision of the 2009 American Recovery and Reinvestment Act, days after Senate Banking Committee Chairman Christopher Dodd (D-Conn.) asked for guidance. The provision requires some 400 companies receiving funds under the Troubled Asset Relief Program to allow a separate advisory shareholder vote to approve executive pay. The say-on-pay provision, together with other requirements in the ARRA pertaining to executive compensation limits, has caused widespread confusion among covered companies ... Among other issues, the companies urged regulators to clarify when the provisions are effective."

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Tuesday, February 24, 2009

User Views On Fair Value, More

I recently interviewed two users of financial reporting -Vinny Catalano and Randy Schostag - on the topic of fair value (mark-to-market) accounting. Both support some modification of FAS 157, Fair Value Measurement. The interviews were conducted on February 12, 2009. Read more in User Views on Fair Value: Vinny Catalano, CFA, Randy Schostag, CFA.

Separately, on the subject of user views on fair value, a joint comment letter was filed on February 13 by the Center for Audit Quality, CFA Institute, Council of Institutional Investors and Consumer Federation of America, cautioning against a retreat from fair value accounting. (I'll call this group the Four C's; as I noted in a post last summer if they add three more like-named groups, they'd be the Seven C's- apropos in this age of discussions about liquidity.) Here are links to the Four C's Feb. 13 letter to Treasury Secretary Geithner, Federal Reserve Board Chairman Bernanke, and SEC Chairman Schapiro, and the Four C's Feb. 13 letter to the Chairs and Ranking Members of the Senate Banking Committee and the House Financial Services Committee (Dodd, Shelby, Frank and Bachus, respectively).

More articles on this subject
Additional articles of interest on this topic include articles by FEI and IMA member Al King, published in FEI’s Financial Executive Magazine (Dec. 2008 Financial Reporting column, see “GAAP vs. IFRS: Will the Real Fair Value Please Stand Up,”) and King's article in the January 2008 issue of IMA’s Strategic Finance Magazine, “Determining Fair Value.”

Also of interest is David Reilly's Commentary published in Bloomberg News on Feb. 19: "Sexing Up the Books Isn't the Answer for Banking Woes."

Another view is taken by Brian Wesbury, Chief Economist of First Trust Portfolios L.P., published in the National Review online Feb. 16 entitled, “Untouchable Accounting Rules? Really?”

See also Elizabeth MacDonald's Feb. 17 post, "Post Dramatic Press Disorder," in her EMac StockWatch Blog on, in which she comments on various accounting and regulatory issues in connection with the credit crisis.

Still More
As noted in previous posts, FEI's Committee on Corporate Reporting (CCR) and the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (CCMC) sent a joint comment letter to FASB on Nov. 25, 2008. The FEI CCR-US Chamber CCMC letter "support[ed] a reexamination of FAS 157 to address deficiencies that have come to light under the stress of the present market conditions ... [and] formally request[ed] a reconsideration of the standard as contemplated under the FASB’s Rules of Procedure."

Also as previously noted, FASB announced last week (see FASB press release) that it will embark on a new short-term project to provide application guidance for applying the fair value accounting rules in inactive or distressed markets.

Technically - and it's important to read the fine print - the upcoming application guidance (apparently reflective of the approach taken in FASB's earlier guidance issued last fall, FSP FAS 157-3, which was said to follow FAS 157) as specified in last week's press release, will pertain to: "determining when a market for an asset or a liability is active or inactive; determining when a transaction is distressed." This approach would appear to continue to focus on a more granular level for determining if, e.g. the market for a particular asset, liability or transaction is inactive or distressed - even if the markets are generally distressed in the macro sense - although macro factors may presumably be among indicators that would be considered in making this deterimination.

Another matter of note is that FASB used the term 'application guidance' in its press release to describe this project, rather than using the term 'modify.' I had to go back to read the SEC's Dec. 30 report to Congress on mark-to-market accounting (referenced in FASB's press release) to see how the terms 'modify' (modification) vs. 'application guidance' were used.

As noted in the SEC's report and on SEC's Spotlight page on Fair Value, Section 133 of the Emergency Economic Stabiliation Act of 2008 required that the SEC study, among other things: "the advisability and feasibility of modifications to [the fair value] standards; and alternative accounting standards to those provided in such Statement Number 157. "

Recommendation #3 in the SEC's report stated: "While the Staff does not recommend a suspension of existing fair value standards, additional measures should be taken to improve the application and practice related to existing fair value requirements (particularly as they relate to both Level 2 and Level 3 estimates)."

It will be interesting to see how the project evolves, particularly given that the SEC's and FASB's wording in aiming for 'application guidance' vs. a modification would seem to imply that whatever guidance is issued may still be hinged on the marketplace participants-exit price value notion in FAS 157 which some have raised questions about, as noted in some of the items linked above.

Social Media, YouTube, and Us

A lot’s been happening on the social media front, with financial executives, attorneys, auditors and other professionals getting into the mix, along with marketers, government regulators, Congress and the President!

Social Media Defined
What is social media ? According to Wikipedia (one of the flagships of social media itself): “Social media are primarily Internet- and mobile-based tools for sharing and discussing information among human beings. The term most often refers to activities that integrate technology, telecommunications and social interaction, and the construction of words, pictures, videos and audio. This interaction, and the manner in which information is presented, depends on the varied perspectives and ‘building’ of shared meaning among communities, as people share their stories and experiences. Businesses also refer to social media as user-generated content (UGC) or consumer-generated media (CGM). Social media are distinct from industrial media, such as newspapers, television, and film. While social media are relatively cheap tools that enable anyone (even private individuals) to publish or access information, industrial media generally require significant financial capital to publish information. Examples of industrial media issues include a printing press or a government-granted spectrum license. ‘Industrial media’ are commonly referred to as ‘traditional,’ ‘broadcast’ or ‘mass’ media.”

FEI Engaging on the Social Media Frontier
FEI’s engagement in social media to date includes the FEI Financial Reporting Blog, which currently has over 1,000 email subscribers, is viewed by others via RSS feed, and is carried on a number of blog aggregators, and the FEI Group on LinkedIn, which currently has 2,875 members. FEI also has established a beachhead on another social networking site, the FEI Group on Facebook. Besides our traditional webcasts and conferences, you can view some short educational programs on FEI TV. Some of us have also begun to dip our toes in the water on SecondLife, with FEI staff recently receiving a virtual training session on Second Life, courtesy of the cutting edge folks at the Maryland Association of CPAs (MACPA). (MACPA is the creator of CPA Island on Second Life - more about MACPA below.) We have also written previously in this blog about FASB's Research Office Hours program in Second Life, in which FASB board or staff members meet for an hour with academics through the virtual world of Second Life.

More and more people are using Twitter, which is a means of staying connected to people through posting short messages, called ‘tweets’ – which are limited to 140 characters (hence, the term ‘microblogging’). Unlike Facebook or Myspace, I find most of the people I follow on Twitter are generally focused more on breaking news and related commentary than answering Twitter’s generic question of ‘what are you doing?’ – although people do post the occasional personal news flash, and serve as a sounding board on other’s questions.

The 140 character limit on tweets makes and similar programs essential for those who wish to share links to, e.g. their most recent blog post, or articles they are reading. The main function of twitter is you can enter names (twitter user names, which begin with an @-sign) of people, news websites or organizations you want to ‘follow’ (i.e. if they have a registered user name on twitter, which is free, by the way); and other people can chose to ‘follow’ your updates or ‘tweets.’ You can, if you wish, place a security lock on your updates – which I have chosen to do (although only a couple of the people I follow have chosen to lock their updates); those who are not ‘locked’ have maximum visibility, but I personally prefer to have my updates accessible only by those followers who I ‘approve.’

Some people and news websites on Twitter have over 1,000 followers and follow over 1,000 others themselves; I am a relatively new user and my numbers are on a much, much smaller scale. If you want to know more about who follows me – see this word cloud of my followers –via

If you are not familiar with Twitter, you may be surprised to know there are websites like Tweet Congress, which help you follow members of Congress and the Senate that are on twitter; also, did you know the SEC is on twitter (user name: @SEC_News) - mainly as an additional vehicle to send out press releases; probably encouraged by their Director of Social Media, Mark Story.

A number of public officials and celebrities have an ‘unsanctioned, unofficial’ presence on Twitter, such as the twitter feed for then-President Elect Barack Obama (user name: @BarackObama), whose last tweet prior to becoming president was posted on Jan. 19 (inauguration eve), and numbers over 300,000 followers. Under Obama’s administration, a White House Blog has been established at; to my knowledge the White House does not have an official twitter presence (at least, not yet), although there is an ‘unsanctioned, unofficial’ twitter feed (user name: @WhiteHouse_Blog) which links to the official blog.

Companies are also increasingly using Twitter to post news updates. Other widely read legal and accounting sites you will find with a presence on twitter include @brocromanek (The Corporate blog), @retheauditors (Re: The Auditors), @irwebreport ((IR) Web Report), @footnoted (, @CPA_Trendlines (CPA Trendlines), @brucecarton (Securities Docket), @macpa (The MACPA), @accountingweb (AccountingWeb), and more. Probably the most eclectic twitterer I follow is comedienne/writer Susie Felber (@felbsie) who writes for TruTV’s Dumb As A Blog – recently nominated for a web award by South By Southwest (SXSW). (Full disclosure: @felbsie is my cousin.)

Much of the power of twitter is thru its immediacy, as well as its viral aspects, i.e., if you send a message - say a link to a press release, a news article you are reading, or your latest blog post - to your followers, and they ‘retweet’ it or recirculate it to theirs, and their followers to theirs, etc., you get a geometric progression of spreading the word. The downside is the more people and sites you follow, the harder it may get to see the forest for the trees. I am trying to learn more about software that helps in sorting input in various social networks, particularly twitter; I welcome comments with any suggestions you have.

Survey: What Are CPAs Doing Online?
Whether you are a CPA in an audit firm, or working in business & industry, you are invited to take part in the survey currently under way: “What are CPAs Doing Online,” being conducted by Rick Telberg of CPATrendlines. Some preliminary results were published in CPATrendlines today in CPAs Join the Online Social Networking Party; the survey will remain open for a short time.

Survey results will be presented at upcoming programs sponsored by the Maryland Association of CPAs (MACPA), one of the mavericks in the field of harnessing the power of new media and social networking. MACPA created and runs conferences, training and other programs in the virtual (online) world of CPAIsland on Second Life; they also host a blog called CPASuccess. I’m looking forward to participating in an upcoming program sponsored by MACPA featuring Jeff De Cagna of Principled Innovation. Here’s a link to a Podcast interview of Jeff De Cagna circa Aug. 2008 about social technologies and Web. 2.0, the podcast interview was conducted by Bill Sheridan, MACPA’s Electronic Communications Manager and Editor. In addition, I’m looking forward to attending my first Tweetup this Thursday evening, hosted by MACPA in Columbia, MD. For further info on the tweetup and other MACPA programs, contact Tom Hood, MACPA’s Executive Director and CEO.

Huffington Post Editors on Blogs and Blogging
Rounding out today’s topic of social media - earlier this month (Feb. 5 to be exact) I attended the program, “Huffington Post Editors” at the 92ndStY in New York City. Editor Roy Sekoff, Senior News Editor Katharine Zaleski, Senior Blog Editor Colin Sterling and Columnist Jason Linkins talked about the stories that they find newsworthy – and the balancing act of providing visibility to what they believe people should be reading (e.g. analysis that challenges the status quo), and what people want to read (e.g. other news stories or gossip). My main takeaways from Huffington Post Editors program were comments by Senior Blog Editor Colin Sterling, who said:
  • “To get your (blog) post promoted, say something nobody else is saying; if you latch onto a new part of a story no one has, including every major op-ed in the country,” then it’s something that is more likely to be promoted, and

  • “The best blog posts are when someone who should write about something - does.”
It was also interesting to hear Editor Roy Sekoff explain how the Huffington Post was started to fill the ‘vacuum’ they felt existed vis-à-vis The Drudge Report. Aside from content, they described The Drudge Report as utilitarian and ‘sui generis,’ and were looking to provide something ‘bloggier.’ Sekoff explained blogs are about tone: ‘like something you’d write in an email to a friend, and they’d say ‘holy mackerel.’ Further details from the program can be found in “HuffPost Editors Warm Up 92Y,” by John Tepper Marlin, published in - where else – The Huffington Post. If you wish you had been there (or wish you could be there again) – a youtube video of the program has been posted in the 92Y Blog.

Joining me in the front row at the Feb. 5 Huffington Post bloggers’ program were some of my blogger friends & colleagues - pictured further below, left to right, are Cara Patterson, Melissa Lajara, myself, my BBF (best blogger friend) Francine McKenna, and Francine’s colleague from their former JPMorgan days, Paula Storonsky. Cara is Public Relations Associate at the New York State Society of CPAs (NYSSCPAs) and a writer on their CPA Blog; Melissa is Associate Editor of the NYSSCPA’s newsletter, The Trusted Professional, and is also one of NYSSCPAs bloggers, Francine is author of the Re:The Auditors blog (newly revamped, wow!); and Paula is President & CEO of Athena Enterprises Inc.
By the way, one of the best and most honest writeups I’ve ever seen on the topic of blogging was written by Kevin LaCroix, author of The D&O Diary, in his Nov. 13, 2008 post: On Blogging.

You-Tube and Us
Many people have heard of YouTube, particularly as a site for entertainment, and particularly for the younger set. But, more and more, you can find mainstream material of interest to professionals - try typing in YouTube’s search box things like accounting, audit, FASB, SEC, and PCAOB - it’s interesting what you’ll find. Some professional organizations also offer their own internet TV programs, as noted above, like FEI TV.

Does social networking help bring people together, or distract them from real world networking? In this economy, is real world networking across distances more of a challenge due to budget constraints, and does social networking provide an efficient and/or effective substitute or add-on to traditional networking? How do events like Tweetups, and ‘mixed reality’ events combining programs in Second Life and real life blend the old and the new ways of networking and social networking? These questions and more are still being debated, but it seems from all indications that social networking and social media are here to stay.

Would you like to join FEI on the journey of networking (both traditional and social networking), through our educational events, publications, advocacy and more? Visit our website, check out our membership information and our career center, sign up to receive our blog by email or RSS feed, join our LinkedIn group. And feel free to DM me, IM me, call or email me if you have any questions!

Saturday, February 21, 2009

No IFRS, Ands, or Buts Until Convergence, NASBA Tells SEC

Rick Telberg of CPATrendlines and Michael Cohn of WebCPA were among the first to report yesterday that the National Association of State Boards of Accountancy (NASBA) filed a comment letter with the SEC on Feb. 19 (see NASBA letter) on the SEC's Proposed IFRS Roadmap.

NASBA's letter concluded:

"NASBA recommends to the Commission that the [IFRS] Roadmap be withdrawn due to the concerns [addressed in NASBA's letter]. " The concerns listed by NASBA included the continuing need for the FASB and not letting it become - in NASBA's words - a 'rubber stamp' to the IASB; concerns about jurisdictional diferences in the adoption of IFRS; questions about sufficient guidance mechanisms for applying principles-based IFRS (e.g. compared to FASB's Emerging Issues Task Force in the U.S.); concerns about the IASB's independence, and concerns about the loss of sovereign power of the U.S. (e.g. through the SEC's direct oversight of the FASB, vs. an indirect role in the IASCF Monitoring Board) which NASBA says would "dilute [the SEC's] regulatory influence and impact on U.S. issuers;" concerns about the enforceability of IFRS standards, and concerns about the need to train accountants, owners, managers, investors, bankers currently in practice as well as those currently in college, to get up to speed on IFRS. Thus, NASBA recommended the SEC withdraw the IFRS roadmap at this time.

Moreover, NASBA stated, "To eliminate uncertainty for the U.S. issuers, investors, creditors and other members of the public, NASBA also recommends that the Commission’s withdrawal take place as early as possible."

The bottom line emphasized by NASBA was the need for convergence as a first step. Their letter stated: "NASBA urges the Commission to continue its support of the joint efforts of the IASB and the FASB to converge standards, to the extent possible, as they work to their target completion date of 2011."

NASBA's view is similar to that expressed by PCAOB Board Member Charles Niemeier, particularly at a New York State Society of CPA's conference last fall, in which he supported convergence, but raised concerns about a direct move to IFRS. (See Niemeier 's NYSSCPAs speech.)

According to Tim Reason of , citing in turn Accounting Professor David Albrecht's blog , The Summa, and and a report by Jesse Westbrook and Ian Katz in Bloomberg News, Niemeier is reportedly on the short list of candidates being considered by SEC Chairman Mary L. Schapiro to become the new Chief Accountant at the SEC, in part, the articles say, in light of his views on IFRS.

We previously reported that the SEC has extended the comment deadline on its proposed IFRS Roadmap to April 20, and that a comment letter from FEI was among those cited by the SEC asking for such an extension to provide more time for companies, auditors and others to provide thoughtful comment.

Learn More About IFRS
FEI and Emille Woolf Interational are presenting a two-day program on April 6-7 in New York City, "Essential IFRS: The Standards and Implementation," where you can learn more about IFRS. Read the program brochure for more info.

Wednesday, February 18, 2009

Final Standards On Going Concern, Subsequent Events To Be Effective June 15

Final standards on Going Concern and Subsequent Events are expected to be issued by FASB by the end of March, and will carry an effective date of interim and annual periods ending after June 15, 2009, based on votes taken at the FASB board meeting earlier today.

The effective date above will apply to all companies, public and private.

Biggest Change from Current Practice: Removal of Bright Line for Going Concern
The standards generally move current requirements for assessing whether an entity is a going concern, and assessing the reporting impact of subsequent events- which are currently set forth in auditing literature originally established by the AICPA (and now, for public companies, by the PCAOB) -and moving those standards into FASB accounting literature or Generally Accepted Accounting Principles (GAAP). [NOTE: The action of moving these standards into the accounting literature is also related to FASB's codification project, in which all of GAAP will be codified into one searchable source. As noted in FASB's Dec. 2008 press release, the Codification is expected to be launched on July 1, 2009, following an extended verification period which began on Jan. 15, 2008.]

However, more than just moving existing standards for Going Concern and Subsequent Events from the auditing literature to the accounting literature, certain changes are being made to the current requirements, most notably, that the current requirement to assess going concern for a 12 month period is being changed to align more closely with international standards which do not have a 12 month bright line.

On this point, FASB board members were sympathetic with comment letters received on the Exposure Draft, saying it would be difficult to apply an ‘indefinite’ or ‘infinite’ time period to assess going concern, therefore the board agreed to use wording such that it would not appear their intent is for companies and their auditors to assess a companies’ likelihood of remaining a going concern over an ‘indefinite’ period.

However, the board also decided not to revert to a bright line 12 month (or some other number of months, such as 18 month) period, choosing to remain with a more principles based approach, and to address the concern that companies not make the assessment by considering, e.g. a 365 day window, if they know something significant is reasonably expected to happen on day 366 which would impact their assessment of the entity's ability to continue as a going concern.

To address concerns of commenters that the period to assess whether or not an entity is a going concern shoudl not be an 'indefinite' period of time, FASB agreed to insert wording in the final standard on Going Concern similar to this wording shown as alternative D in today's board handout:

“In assessing whether the going concern assumption is appropriate, management shall take into account available information about the future, which is at least, but not limited to, 12 months. The time period is designed to capture events occurring beyond twelve months which are reasonably foreseeable and materially affect the entity’s ability to continue to meet its obligations as they come due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions. To evaluate whether there are reasonably foreseeable events beyond twelve months, management shall take into account material information, significant assumptions and events which are available to the entity without undue cost and effort.”

Additionally, the staff may add some examples to illustrate the board’s intent and will work on wording to achieve the board's intent.

Board member Leslie Seidman suggested they consider including in the final standard an affirmative statement such as "It is not the board’s intent that management would have to forecast significantly into the future" in terms of complying with this standard.

We will post further highlights from FASB's board meeting in a summary on . For official results of FASB meetings, see FASB's Summary of Board Decisions posted by FASB in its News Center. Separately, as noted in our blog post earlier today, FASB Chairman Robert Herz also announced at the board meeting today that a number of new projects are being added to its agenda relating to Fair Value and other matters.

FASB Adds Projects On Fair Value, More

At its board meeting earlier today (Feb. 18), FASB Chairman Robert Herz announced the board is adding a number of new projects to its agenda, including - but not limited to - a number of short-term projects on fair value accounting and disclosure (see related FASB press release), and detailed further below. Per Herz’ remarks, here are the projects FASB is adding to its agenda:

Fair Value Accounting
This will be a short term project to try to provide additional application guidance on fair value measurements in the current environment, including:
  • determining when a market for an asset or a liability is active or inactive;
  • determining when a transaction is distressed; and
  • applying fair value to interests in alternative investments, such as hedge funds and private equity funds. Herz noted the NAV project would “consider the measurement basis for Net Asset Values (NAV) for alternative investments, and how that interacts with FAS 157.” He added, “that’s something that a group at the AICPA has been looking at, and [the AICPA] has a paper out for comment, but at our meeting with our Valuation Resource Group, seemed like something we ought to look at as well.” Herz added, “My understanding is the NAV project is pretty short term, [with the] goal of getting guidance [out], particularly for not-for-profits - when they [have] investments with hedge funds, private equity funds- [to get that guidance out] in time for June 30 year-ends.”

Potential additional disclosures under FAS 157.

Regarding potential new disclosures, Herz said, “A number of users have asked us [to] includ[e] things like:

  • sensitivity analysis,
  • transfers between categories"

As to timing of the disclosure project, he said, “We’ll have to see what we come up with,” adding if anything, to try to get it “in place 2009 year end, if not sooner.”

He noted this project is in addition to Proposed FSP FAS 107-b which is currently out for comment until March 2nd, which proposes to expand the FAS 107 fair value disclosures for financial instruments to be provided at interim periods, not just annual periods). The fair value projects are described in a press release issued by FASB earlier today.

Deferred Tax Assets and Liabilities

  • Herz said, “A project has been added on application issues related to accounting for deferred taxes and liabilities on available debt securities that are expected to be held for recovery.”
  • He added, “Right now there’s two methods out there in practice for considering the need for a valuation allowance or not, in the fall the SEC staff said they would, in the interim , accept both, provided there is a policy disclosure, but people believe there should be one method, so we’re going to look at that.”
  • As to timing, he described this project as ‘fairly short term.’

Real Estate Investment Funds
Herz said, “We’ll start looking at, the staff is trying to assemble a working group on issue under real estate investment fund reporting, under the investment company (audit) guide… to see if we can provide some guidance.” He did not specify timing, saying this project is more ‘exploratory’ at this point.

Oil and Gas (FAS 69):

Herz said, “We’ll look at amendments to FAS 69 oil & gas disclosures pursuant to changes the SEC recently made to their requirements that have some knock-on effects on our standards.”

Annual Improvements Project
Herz said “We’ll try to have an annual improvements project, where things come up that may be somewhat [in the] nature of technical corrections, [or] somewhat in the nature of two types of treatments; [which] probably can [be] resolve[d] fairly quickly.” See also "jackpot liabilities" below, which would be part of this project.

Jackpot Liabilities of Casinos
Herz noted, “In the first annual improvements project, [we will] look to issue of treatment of base jackpot liabilities of casinos, [there are] different methods, some feel are not in accordance with base literature.” As to timing, he said he expects the annual improvements project to be taken up ‘mid-year.’

Consolidation of Noncontrolling Interests
Herz said, “We’ll [FASB will] ask the EITF [FASB's Emerging Issues Task Force] to broaden some of the discussion it’s had relating to application of FAS 160 on consolidation of Noncontrolling Interests, to broaden to a few other matters that have come to our attention.”

Sunday, February 15, 2009

FASB-IASB Group Discusses Fair Value, Financial Stability

What better day than Friday the 13th for a group called the Financial Crisis Advisory Group (FCAG) to debate financial stability vs. transparency, fair value (mark-to-market) accounting, and dynamic vs. incurred loan loss provisions. FCAG, formed in December, 2008 as a joint advisory group of FASB and the IASB, is co-chaired by former SEC Commissioner Harvey Goldschmid, and Hans Hoogervorst, Chairman, AFM (the Netherlands Authority for the Financial Markets). Its members are mainly current and former regulators and some business and investor representatives.

Fair Value
FCAG members were asked whether further guidance on fair value (mark-to-market) was needed. Here are a few highlights of the discussion:
  • Former Comptroller of the Currency Gene Ludwig-observed, “One could say, ‘how can you be against fair value accounting, it’s fair?’” However, he added, “The issue before the house is not whether it’s fair value, but whether it should be driven by market value.” He continued, “I would put to you we’ve clearly - not just in the court of public opinion… at a time when markets don’t function, you can’t use market values to be equivalent to fair value, we have driven economic reality, we haven’t reflected economic reality.”
  • An FCAG member said, “An inquiry for the accounting profession, if one doesn’t get this right, it undercuts in the public’s mind the value of accounting. If we all had to sell our houses in 24 hours, the value we would get is de minimus; we have got to have a more robust view of what values are, what we have undercut is the voracity of [financial] statements.”
  • FASB Chairman Robert Herz, an observer at the meeting, said, “The standard [FAS 157, Fair Value Measurement] says ‘orderly sale,’ not a distressed sale.”
  • Ludwig commented, “Another way to conceptualize this, if you took mark-to-market to its extreme and said you have to value corporations on a mark-to-market basis, simply based on the market, you’d get very distorted valuations because of volatility; at a point in time, [prices can] dramatically change.”
  • Goldschmid said: “… I’ve never seen a CEO who didn’t believe there is light at the end of the tunnel…”
  • IASB Board member Jim Leisenring, an observer at the FCAG meeting, later said, “The light at the end of the tunnel might be the headlight on a train.”
  • Goldschmid said, “If I read the standard here [FAS 157] and the international standards correctly, there was much more room to take account of illiquid markets, distressed sales, than people were using; there was some naiveté out there, some idiosyncratic sale, [but] people [are] saying you have to take that.”
  • FASAC Chairman Dennis Chookaszian, also an observer at the meeting, added that the clarification issued by FASB (presumably referring to FSP 157-3, issued in Oct. 2008) “provides a clarification that gives you lots of flexibility, but it is not being used.” As to why it is not being used, he surmised, “It is difficult to come up with something credible, and you can’t ignore that fact that if you are a CFO or an accounting firm, you [may] get second guessed, when a year or two later the real numbers come out; even tough you believe it [at the time], you may not want to take that position… cannot ignore reality in the U.S. with substantial litigation risk; changing an accounting rule won’t do anything if people are concerned about that risk.”
  • Goldschmid asked Ludwig: “Are you arguing with 157 [FASB Statement No. 157, Fair Value Measurement] in the U.S.? Which parts? Category 3? Or [that] you take too long to get to Category 3?”
  • Ludwig replied, “Particularly when markets don’t function, but perhaps [as a] general rule, [one should] look at other [values], e.g. discounted cash flow, as a reflection of valuation of assets.”
  • A FCAG member said: “There is a difference between price and value; looking at markets [is looking at] price, not looking at value.”
  • Herz said, “That’s a broad discussion, but how far are we going to go?” He added, “I might support certain things for certain classes to use discounted cash flow, in fact [FAS] 157 tells you to do that.” He added, “Application in practice may be strained now because of market conditions, behavioral implications of auditors, preparers, to just find a price, but the standard doesn’t tell you to do that.” Rather, he said, “The question is: how far can you go in ignoring market price.”
  • Jerry Corrigan, former President of the Federal Reserve Bank of New York, (and now with Goldman Sachs) expressed his support for fair value accounting, and decried reports of ‘draconian’ calls for suspension of fair value. (FCAG co-chair Goldshmid observed that no one at FCAG had called for any such draconian measures.)
  • Goldschmid said, referencing FCAG’s January 20 meeting in London, and also referencing the SEC staff report to Congress published Dec. 30, 2008 on mark-to-market accounting, which was led by SEC’s (then-Deputy Chief Accountant, now-Acting Chief Accountant) Jim Kroeker: “I should emphasize what we concluded in London, and what Jim Kroeker concluded, that fair value accounting had nothing to do with ...[the financial crisis] Jim [Kroeker] looked at how many banks…” [NOTE: Marie Leone of published a summary of FCAG's Jan. 20 meeting, held in London, here.]
  • Ludwig asked Kroeker (an observer at the FCAG meeting): “[Did you look at] banks or banking organizations, if you look at banks by charter, they are mostly hold-to-maturity; but by .... very large [portfolio] of trading assets [are] marked-to-market.”
  • Kroeker replied, “[We looked at] financial institutions, and found nonperforming loans seemed to be the primary issue at financial institutions, it wasn’t mark-to-market.”
  • Corrigan also questioned some of the statistics in the SEC’s report to Congress on mark-to-market accounting issued Dec. 30, 2008. He questioned in particular the relatively low proportion of assets marked-to-market as shown in the SEC study, and said, “I don’t think it is representative of the very large systemically important banking and universal banking groups; the incidence of the use of fair value I’m quite certain is a lot higher than the numbers that you would say for that relatively small but very important group of banks.”
  • Kroeker responded, “The study took the thirty largest financial institutions, so it is included in the population.”
  • Corrigan replied, “Those numbers just don’t sound right to me… I’ve looked at these numbers pretty carefully.”
  • Corrigan continued, “I don’t think it’s any surprise I say as a creature of my environment, I learned at Paul Volcker’s knee, historic, cost accounting, especially for loan type products, discounted cash flow, [was like] Moses coming down from the mountain, and now after 15 yrs at Goldman Sachs where I live and breath fair value for everything, I have a somewhat different view of who Moses is or was. In conclusion, I think watering down fair value is the wrong way to go, and if anything, [the] direction [should be], as suggested earlier, to find ways to improve it, and with those improvements in place, find ways to broaden its application.”
  • Goldschmid added, “Which would allow you to do a fair amount of simplification too.”

Mixed Attribute Model

  • Goldschmid’s reference to ‘simplification’ above is also likely related to the stated aim of FASB and IASB’s current project to ‘simplify’ financial instruments accounting, in part by potentially requiring full fair value for all financial instruments, rather than the current ‘mixed attribute’ model. The mixed attribute model measures some balance sheet items at fair value, some at historic cost, and others at lower of cost or market or by other measures. FASB and the IASB suggest in their Discussion Paper issued in March 2008 that a move to full fair value accounting for all financial instruments would be a simplification, however, not all constituents concur on the degree of ‘simplification’ that would provide, and some, like the U.S. banking agencies, in a joint comment letter filed on the Discussion Paper in October, expressed “concerns about the wider use of fair value accounting for financial instruments.”
  • Sylvie Matherat, an observer from Basel committee at the FCAG meeting, said: “Central bankers, regulators… very much prefer the mixed attribute model … for [the] reason, there are thing that are traded, things that are not.” She added, “There are two books in the prudential framework, the banking book and trading book,” and said, “we have been quite uncomfortable with some of the fair value [accounting], [and by] participating through this Financial Crisis panel, [to] try to give some guidance how to value those illiquid assets.” She added, “We are quite reticent for the future, to see all those values built on uncertainty flow through the P&L.” Noting comments made earlier by Jerry Corrigan on a lack of correlation between certain accounting practices and the strength of certain financial institutions, she continued, “There is no correlation between the quality of [certain assets] and behavior in prices.. mostly because the valuation does not depend on the way you value your own assets, but on how the others in market are valuing your asset.”
  • Toru Hashimoto, Former Chairman, Deutsche Securities Limited, Japan, said, “Business purposes and management’s intent should be the keys to determine when financial instruments are carried at fair value, and when the changes in fair value should be included in earnings
  • Another FCAG member said: “[With] fair value [there is a] tendency… it is important to recognize, may lead to an overstatement of risk; at the same time, [there is] probably an understatement of risk in the held-to-maturity portfolio.” This person added, “[U.S. Treasury] Secretary Geithner’s stress testing [banks] … is a fair value exercise... looking for hidden losses not discovered yet, the overall picture is, risk may be sooner understated, than overestimated.”
  • Fermin del Valle of Argentina, former President of the International Federations of Accountants, said: “Let me share with you some thoughts from real experience, coming from a country where a full fair value model was adopted more than 10 years ago, and try to share with you some of the reasons why we abandoned that model and we came back to a mixed model.
  • Hans Hoogervorst, Co-chair of FCAG, said he heard a: “General consensus the current mixed attribute system is in need of serious cleanup, needs more consistency, that we support all the efforts that should be done in the near future, and hopefully we can reach some consensus in the next meeting about the principles [under] which this exercise should be undertaken, that is something we can try to work on as well.”

Transparency vs. Financial Stability

  • In response to earlier questions addressed during the meeting about who financial reporting should be directed to, and whether financial reporting should have as a stated objective ‘financial stability’ (including whether a ‘financial stability’ objective can coexist with a ‘transparency’ objective) FCAG members seemed to support investors as the primary audience to whom financial reporting should be addressed/designed, but many FCAG members argued that stakeholders of financial reporting also include depositors and lenders, with some arguing a term broader than ‘investors’ should be used to adequately reflect key stakeholders.
  • FCAG co-chairman Harvey Goldschmid asked if a financial stability objective and a transparency objective can be ‘reconciled,’ and the FCAG meeting handout asked if members were concerned about potentially ‘sacrificing’ transparency for financial stability; numerous FCAG members indicated that a financial stability objective, even if not explicitly stated, can (and to some, should) coexist with a transparency objective for financial reporting.
  • After hearing FCAG members share their views, Goldschmid said, ““[What’s] common to investors [is] they want transparency, integrity.” He added, “If I hear the room correctly, there is great concern about losing integrity, transparency, with any technique.”

Dynamic Provisioning, More

The highlights above include just some of the areas addressed at the FCAG meeting, another important issue discussed related to dynamic loan loss provisions, including some participants’ views that the SEC discourages financial institutions from taking provisions that they otherwise may wish to take.

You can still listen to the archived webcast of the four hour FCAG meeting if you missed it, but if you prefer reading about it (or in addition to listening to it), check out FEI’s 14-page “Detailed Summary of FASB-IASB Financial Crisis Advisory Group Meeting.” (And of course, reference should be made to the official FCAG meeting minutes when they are posted.) Our 14 page detailed summary (as well as a 2 page shorter version) are available to FEI members only, and other member benefits include our bi-weekly electronic newsletter, FEI Express, our monthly magazine, Financial Executive, reports issued by our research affiliate (FERF), discounts to attend conferences, career center services, and more; we invite you to check out the benefits of FEI membership. As a special offer to blog subscribers - if you are not currently an FEI member, (and even if you are!) if you tell a friend or colleague about the FEI blog, and they sign up for the blog by emailing (tell them to write in the Subject line of their email: Sign Up-Special Offer – and to give us your name and email address too) – then we’ll email you and that person a copy of our detailed summary.

User Views on Fair Value
I interviewed two users of financial statements, both Chartered Financial Analysts (CFAs) (with additional certifications as well) - to share their personal views on some of the issues discussed by the Financial Crisis Advisory Group (FCAG). (The persons I interviewed are not members of the FCAG.) Watch for our next post on that subject.

My two cents
(Actually, in this market, maybe I should call this section ‘my one cent.’) I must also remind you these views are my own, see the disclaimer in the right margin of the blog, above the blogroll.

Cent One: Expressions of “Consensus”
At several points in the FCAG meeting, one or the other of its co-chairs said “I think we have a consensus” or “I heard a consensus.” However, the group did not take any formal votes, and on some issues, certain FCAG members held diametrically opposed views.
This expression by the chair of a perceived ‘consensus’ gave me a sense of déjà vu, reminding me of some of the earliest meetings of another advisory group – the PCAOB Standing Advisory Group (SAG), when it was first formed. After getting input around the table as to whether further improvements were needed to the original rules issued by the SEC and PCAOB under Sarbanes-Oxley Section 404 (internal control reporting), the then-SAG chair said he heard a consensus that no further guidance was needed. However, several of the individual members of the SAG and some of the expert panelists they had invited to speak to them had voiced the need for some change, and no formal vote was taken. Therefore, to me, personally, the chair’s expression of a ‘consensus’ appeared to be more a statement of ‘the sense of the chair’ than reflective of any group ‘consensus’ per se, and was notable in its support of the status quo/current action plan of the organization it was formed to advise. A couple of years and numerous roundtables later, the SEC and PCAOB agreed that yes, further guidance was needed, and issued such guidance (including management guidance issued by the SEC, and a new auditing standard issued by the PCAOB (AS5) replacing AS2 on internal control auditing) in 2007. I note this as a cautionary tale for readers of this summary, or meeting summaries generally, when such summaries note that the chairman of an advisory committee stated a consensus was reached, when no formal vote was taken and differing views were expressed.

Cent Two: Do We Have to Choose Between “Transparency” and Financial Stability
The phrasing of certain questions posed verbally to FCAG members at the meeting, and detailed in the FCAG meeting handout, referencing terminology such as, if there should be a potential ‘sacrifice’ of transparency for financial stability, whether one could ‘reconcile’ transparency with a financial stability objective for financial reporting, etc., could be viewed as ‘leading’ questions, which as constructed may have only one logical answer, thereby potentially impacting the range of discussion. This point was alluded to by former Comptroller of the Currency Gene Ludwig, when he stated, “How can you be against fair value – it’s ‘fair.’” But he continued, “The issue before the house is not whether it’s fair value, but whether it should be driven by market value.” (See the rest of his remarks above.) Ludwig’s remarks open the kimono, so to speak, on the need to consider the meaning of the word ‘transparency’ as relates to fair value as currently reported in accordance with FAS 157.

What if, at the extreme (and today’s distressed market conditions could probably be characterized as fairly extreme) the only observable market price is a single market quote – or a ‘hypothetical’ market quote – obtained in accordance with FAS 157 as it is currently interpreted in practice? (Although FASB Chairman Robert Herz noted at the FCAG meeting FAS 157’s direction to use market values expressly states it applies to orderly markets, FCAG members noted, as did members of FASB’s Valuation Resource Group at the February 5 VRG meeting, that in practice, financial statement preparers and auditors feel pressured to use market values, even in distressed markets, when interpreting FAS 157 – and FSP 157-3 issued last October, as those standards are currently worded.)

Is it the case that because the word ‘market,’ ‘market participant,’ or ‘hypothetical market participant’ – words at the core of the FAS 157 fair value model - are used in arriving at ‘fair value,’ that even in distressed, illiquid, or virtually nonfunctioning markets, that value is ‘transparent’? What does such a value really represent - the ‘fair value’ of the asset, a ‘fire sale’ price, or something else? How does one reconcile – conceptually- when there is a material difference between a fundamental valuation (e.g. discounted cash flow analysis) vs. third party real or ‘hypothetical’ market quotes in a dysfunctional market? These questions get at the heart of the ‘transparency’ of certain fair value measures, and some may say these questions are the primary questions that call for consideration, (similar to questions 5 and 6 covered at the FCAG meeting, on fair value accounting), rather than pitting financial stability vs. transparency (the question teed up as question 2 at the FCAG meeting).

Although some people appear to argue that accounting can’t serve two masters – investors who want ‘transparency’ – and bank regulators interested in financial stability (and people in that camp sometimes argue that bank regulators can, if they wanted to, adjust out fair value marks from banks’ financial statements for regulatory capital or prudential supervisory purposes) – I reflect back on testimony of former FDIC chairman William Isaac at the SEC’s Oct. 29, 2008 roundtable on mark-to-market accounting (see transcript), when he said:

“… I want to take back the words ‘fair value.’ You can’t have those words. You can’t own those, because I am for fair value accounting. So we’re arguing about what is fair value, and I’m telling you that I don’t believe marking to a computer model or fire sale prices based on distressed sales is fair value.” …. (pg. 46 of transcript) “I am also concerned… we keep on making the distinction between what the regulators can do with capital versus the balance sheet effect. And I think in the world we’re in with short-sellers and the rating agencies, and a lot of volatility in the markets...” (pg. 62 of transcript) …"I just don't think it's appropriate to mark something arbitrarily to an index or to a market price when the market’s not functioning and destroy value, run it through the income statement, and take it out of the capital accounts of the company. And it doesn't matter what the regulators think. I don’t believe that a regulator would have wanted to close down Wachovia, but the market was sure closing it down. I don’t think a regulator would have wanted to close down WaMu, but the market sure wanted to close it down, because of these reports we're forcing them to make about their losses and the depletion of their capital. So nobody even asks what the regulators think.” (pg 49-50 of transcript)

Friday, February 13, 2009

FEI Survey on Treasury's Financial Stability Plan: Prelim Results

As we previously reported, earlier this week U.S. Treasury Secretary Tim Geithner announced Treasury’s Financial Stability Plan. (See related FEI summary; further details at )

The day after Geithner made the announcement, FEI, an association of senior financial executives, launched a survey to elicit its members’ views on Treasury’s plan. The survey was released the evening of February 11, via FEI’s bi-weekly electronic newsletter FEI Express.

100 responses were received as of Feb.12; the preliminary results based on those response are:

1. Do you believe the Financial Stability Plan will help your company?

  • Yes 16%
  • No 61%
  • Don’t know 23%

2. Do you believe the Financial Stability Plan will help the economy?

  • Yes 28%
  • No 54%
  • Don’t know 18%.

Do you believe credit will become more readily available as a result of the Financial Stability Plan?

  • Yes 16%
  • No: 60% (broken down as follows): No-because of hard to value troubled assets 13%; No- because of fair value/mark-to-market accounting 8%; No- because of a combination of the above 39%
  • Don’t know: 11%
  • Other: 12%

For further details, see FEI Survey of Financial Stability Plan: Preliminary Survey Results.

Wednesday, February 11, 2009

U.S. Chamber Recommends 23 Ways To Improve SEC

This morning, the U.S. Chamber of Commerce released a report entitled Examining the Efficiency and Effectiveness of the U.S. Securities and Exchange Commission. David Hirschmann, President & CEO of the Chamber's Center for Capital Market Competitiveness, provides some highlights from the report in the ChamberPost Blog today.

In related news, a program is being hosted by the Chamber from 10:30am - 12:30 EST today, which is being webcast, to discuss the Chamber's recommendations. The panelists include:
  • Paul Atkins, former Commissioner, U.S. Securities and Exchange Commission
  • Jack Katz, former Secretary, U.S. Securities and Exchange Commission
  • Ed Knight, Executive Vice President and General Counsel, Nasdaq Stock Market, Inc.
  • Harvey Pitt, Chief Executive Officer, Kalorama Partners LLC
  • Eric Roiter, former General Counsel, Fidelity, and Professor, Boston College Law School
  • Kara Scannell, SEC Reporter, The Wall Street Journal (moderator of the panel)

The twenty-three recommendations made by the Chamber fall into the categories listed below.

Strengthening [SEC's] Management, Structure and Oversight

  1. The Division of Trading and Markets and the Division of Investment Management should be realigned into a Division of Investor Protection and Retail Financial Services Regulation and a Division of Market Oversight and Operations. The Examination Programs of the Office of Compliance, Inspections, and Examinations (OCIE) should be assigned to these new divisions.
  2. The SEC should create an accelerated conditional approval process for new investment products or services.
  3. The five-member Commission should play a greater ongoing role in the interpretation and application of regulatory policy. This may require Congressional action to amend the
    Government in the Sunshine Act (Sunshine Act) that was passed in 1976 that, among other
    requirements, mandates that every portion of every meeting of an agency shall be open to public observation. Although the Act was developed to create greater openness in government, it has had the unintended consequence of restricting valuable communications between Commissioners and SEC Staff.'
  4. The SEC should create a Chief Operating Officer (COO) position with sufficient authority to oversee daily operations throughout the SEC.
  5. The SEC should establish a coordinating council, chaired by the COO, to resolve issues or disagreements involving more than one division or office.
  6. The SEC should expand the breadth of its staff expertise. Legal and accounting expertise should be complemented with staff experts in capital markets operations and the business operations of regulated entities as well as financial economics.
  7. The SEC should develop a knowledge management program to transfer information and expertise between divisions, preserve the knowledge and experience of departing
    staff, and provide future staff with ready access to materials explaining and documenting the analysis and reasons for actions taken or not taken.

Improving the Exemptive Order Process

  1. An expedited process should be created for routine exemptive applications that mirror prior exemptive orders.
  2. Incomplete applications should be rejected with standard rejection letters, or “bedbug letters,” consistent with published standards explaining the grounds for rejecting deficient filings.
  3. Internal compliance deadlines should be adopted for staff review and action, and apply to applicant responses or revisions based upon staff comments.
  4. Expanding the use of exemptive rules could substantially reduce the number of routine applications. Rule-writing authority for exemptive rules should be reassigned to the same staff that acts on exemptive applications.
Improving the Self-Regulatory Agency Rule Filing Process
  1. In 2006, 127 filings (12.5%) were rejected, and in 2007, 138 filings (12%) were rejected by the SEC staff as incomplete or incorrectly filed. These high rejection levels demonstrate that an expectation gap between the Commission and SROs exists. The division should formulate a standard that articulates the grounds for rejecting a filing as improperly filed. The division should also require its staff to send a rejection letter to the SRO identifying which items on Form 19b-4 are deficient.
  2. Waivers of statutory time limits should be the exception, not the norm. All requests for waivers of statutory deadlines should require senior-level approval and should be time limited.
  3. The five-day pre-filing requirement should be eliminated.
  4. The Commission should re-delegate to the staff the authority to abrogate SRO filings that are deemed effective upon filing.
  5. The SEC should order hearings on SRO filings that raise complex issues that cannot be resolved following the notice and comment period. Division staff should have responsibility for reviewing all papers submitted in response to the order for hearing and for submitting a recommendation to the Commission. An administrative law judge should be assigned only for exceptionally complex matters.
  6. The SEC should create an optional conditional approval process to encourage
    SRO innovation.

Improving the No-Action Letter Process
  1. The Commission should rationalize the current system of informal guidance by
    reducing the number of vehicles it uses to provide guidance. Each operating division should develop a web-based system of Compliance and Disclosure Interpretations (CDI), which should replace Staff Legal Bulletins, FAQs, summaries of staff comment letters, small entity compliance guides, and interpretive letters.
  2. The Commission should publish guidelines distinguishing the use of no-action letters and exemptive orders.
  3. The practice of issuing no-action letters of general applicability should be discontinued in favor of exemptive orders or emergency orders, as appropriate.
  4. Each division should post on the SEC Website a list of the staff members, with e-mail addresses and phone numbers, who are authorized to provide informal assistance on specified topics, with all substantive responses promptly posted on the web-based CDI system, following supervisory review.
  5. Each division should attempt to provide a final response to a no-action request within 90 days of receipt. To promote compliance, each division should be required to send a quarterly advice memorandum to the Commission identifying all requests pending for 90 days or longer. The memo would identify the issues presented that must be resolved and provide a target date for resolution. The division should also indicate if it is unlikely that a no-action letter will be issued.
  6. A no-action letter should be viewed as informal guidance rather than a method of setting regulatory policy. Because it is often difficult to distinguish interpretation from policy on a
    prospective basis, the Commission should annually issue interpretive statements that review, adopt, and codify significant staff positions contained in no-action letters. These releases could also be used to withdraw or revise a no-action position previously taken, based upon new facts or an analysis of how it has been interpreted. The Commission should issue these interpretive statements following an opportunity for public notice and comment. The original recipient of a no-action letter could continue to rely upon the assurances provided in the letter. Any revisions or changes reflected in the Commission interpretative release would apply prospectively to third parties.

Tuesday, February 10, 2009

Fact Sheet, Geithner Speech Posted: Treasury's Financial Stability Plan

Earlier today, U.S. Treasury Secretary Tim Geithner made a speech outlining the government's plan to get credit flowing again in the economy. Here is a link to the speech: Secretary Geithner Introduces Financial Stability Plan, and here is a link to the Financial Stability Plan Fact Sheet which has been posted on a new website Geithner announced that includes materials relating to the plan, at See also our post from earlier today.

Unstuck From The Moment: Financial Stability Plan to be Unveiled by Geithner Today

Ahead of Treasury Secretary Tim Geithner’s speech slated for 11am today, at which he will unveil the Obama administration’s plan to shore up the nation’s banks and get credit flowing again, Deborah Solomon and Damian Paletta report in today’s WSJ (Banks to Get Stress Test Before Aid):

  • In an attempt to cast the program in a new light, the administration is renaming the Troubled Asset Relief Program the Financial Stability Plan.
  • The expanded effort could see as much as $2 trillion in financing flowing through the system, according to Congressional officials briefed Monday night. The expanded Fed facility and the "bad bank" could each reach $1 trillion in size, both of which would be seeded with bailout funds.”
  • The program will remain a part of Treasury but may eventually be separated.
  • [As part of the plan] [m]any U.S. banks will be subjected to rigorous examinations [‘stress tests’] to see if they are healthy enough to lend before receiving additional financial aid, according to people familiar with the matter.
  • In addition to fresh capital injections into banks, the new approach will include programs to help struggling homeowners; a significant expansion of a Federal Reserve program designed to jump-start consumer lending; and a private-public partnership to relieve banks of bad assets.

Separately, in his first prime time address as President, (see: Text of Obama’s Press Conference, Feb. 10, WSJ) President Barack Obama provided a briefing last night on the state of the economy, focusing on the economic recovery package that passed each house of Congress and now awaits a conference bill. He also spoke in general terms about the impending announcement of the bank rescue plan.

Regarding the economic recovery/stimulus package, Obama said:

  • After many weeks of debate and discussion, the plan that ultimately emerges from Congress must be big enough and bold enough to meet the size of the economic challenges that we face right now.
  • [T]he plan is not perfect. No plan is. I can't tell you for sure that everything in this plan will work exactly as we hope, but I can tell you with complete confidence that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans. My administration inherited a deficit of over $1 trillion, but because we also inherited the most profound economic emergency since the Great Depression, doing a little or nothing at all will result in even greater deficits, even greater job loss, even greater loss of income, and even greater loss of confidence. Those are deficits that could turn a crisis into a catastrophe. And I refuse to let that happen. As long as I hold this office, I will do whatever it takes to put this economy back on track and put this country back to work.
  • I want to thank the members of Congress who've worked so hard to move this plan forward. But I also want to urge all members of Congress to act without delay in the coming week to resolve their differences and pass this plan.
  • We find ourselves in a rare moment where the citizens of our country and all countries are watching and waiting for us to lead. It's a responsibility that this generation did not ask for, but one that we must accept for the future and our children and our grandchildren. And the strongest democracies flourish from frequent and lively debate, but they endure when people of every background and belief find a way to set aside smaller differences in service of a greater purpose.
  • That's the test facing the United States of America in this winter of our hardship. And it is our duty as leaders and citizens to stay true to that purpose in the weeks and months ahead. After a day of speaking with and listening to the fundamentally decent men and women who call this nation home, I have full faith and confidence that we can do it. But we're going to have to work together. That's what I intend to promote in the weeks and days ahead.

Regarding the impending announcement of the bank rescue plan, he added:

  • Tomorrow [Tues. Feb. 10] my Treasury Secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again.
  • And that means having some transparency and oversight in the system.
  • It means that we correct some of the mistakes with TARP that were made earlier, the lack of consistency, the lack of clarity in terms of how the program was going to move forward.
  • It means that we condition taxpayer dollars that are being provided to banks on them showing some restraint when it comes to executive compensation, not using the money to charter corporate jets when they're not necessary.
  • It means that we focus on housing and how are we going to help homeowners that are suffering foreclosure or homeowners who are still making their mortgage payments, but are seeing their property values decline.

Responding to a question from Julianna Goldman of Bloomberg news, the President said:

  • My immediate task is making sure that the second half of that money, $350 billion, is spent properly. That's my first job. Before I even think about what else I've got to do, my first task is to make sure that my Secretary of the Treasury, Tim Geithner, working with Larry Summers, my National Economic Advisor, and others, are coming up with the best possible plan to use this money wisely -- in a way that's transparent; in a way that provides clear oversight; that we are conditioning any money that we give to banks on them reducing executive compensation to reasonable levels; and to make sure that they're not wasting that money.
  • We are going to have to work with the banks in an effective way to clean up their balance sheets so that some trust is restored within the marketplace, because right now part of the problem is that nobody really knows what's on the banks' books. Any given bank, they're not sure what kinds of losses are there. We've got to open things up and restore some trust.
  • We also have to deal with the housing issue in a clear and consistent way. I don't want to preempt my Secretary of the Treasury; he's going to be laying out these principles in great detail tomorrow. But my instruction to him has been, let's get this right, let's create a template in which we're restoring market confidence. And the reason that's so important is because we don't know yet whether we're going to need additional money or how much additional money we'll need until we've seen how successful we are at restoring a sense of confidence in the marketplace, that the federal government and the Federal Reserve Bank and the FDIC, working in concert, know what they're doing. That can make a big difference in terms of whether or not we attract private capital back into the marketplace.
  • And ultimately, the government cannot substitute for all the private capital that has been withdrawn from the system. We've got to restore confidence so that private capital goes back in.

In response to a question from Helene Cooper of the New York Times, he added:

  • I'm trying to avoid preempting my Secretary of the Treasury, I want all of you to show up at his press conference as well; he's going to be terrific. But … one of my bottom lines is whether or not credit is flowing to the people who need it. Is it flowing to banks -- excuse me, is it flowing to businesses, large and small? Is it flowing to consumers? Are they able to operate in ways that translate into jobs and economic growth on Main Street? And the package that we've put together is designed to help do that. And beyond that, I'm going to make sure that Tim gets his moment in the sun tomorrow.

Mark-to-Market Debate Continues
We noted in our most recent post, and have covered this issue in prior posts (e.g. on some of the roundtables held last fall by the SEC and FASB on mark-to-market accounting and the credit crisis), that fair value or mark-to-market accounting is among the issues that crops up in discussions relating to the financial crisis and the bank rescue/stability plan.

Broadly speaking, there are generally two schools of thought - which may or may not necessarily be viewed as in conflict - depending where you stand: (a) that fair value (FV) or mark-to-market (MTM) accounting provides necessary transparency to toxic assets, and/or (b) that FV or MTM fuels a procyclical downward spiral in valuations of assets.

Somewhere in between, there may be a third school of thought, which may represent more of a compromise view: (c) that FV or MTM as currently constructed may contribute to an unnecessary downward spiral in valuations.

Readers of this blog normally tend not to post comments, but we received some very insightful comments on yesterday’s blog post, including comments about standard valuation procedures used by appraisers and recognized by the courts vis-à-vis the FV/MTM accounting rules. Additionally, at the suggestion of an Anonymous commenter on yesterday’s post, I added some links to a few more articles in the Comments section, such as Goldman Sachs CEO Lloyd Blankfein’s column supporting FV/MTM which appeared in yesterday’s FT, and a number of other articles; see the comments section of yesterday’s post for links.

Besides the articles I linked in yesterday, additional articles published late yesterday include: Geithner Needs to Fix Mark to Market Rules by Robert Holmes,, and Mark to Market Reform More Important Than Stimulus by Brian Wesbury, Chicago Observer.

O’Neill, Snow Step Up, Speak Out on Bailout
I was particularly intrigued by the remarks of two former Secretaries of the Treasury: Paul O’Neill and John Snow, in an article by Brendan Murray published yesterday by Bloomberg News, O’Neill, Snow Call for Transparency, Clarity on Toxic Assets, especially O’Neill’s suggestion relating to ‘quarantining’ toxic assets. Here are some excerpts from the Bloomberg article:

  • “We won’t get out of this mess and get lending returned to normal until the toxic assets are purged,” John Snow, who headed the department from 2003 to 2006, said in an interview today… “Private equity, which is pretty good at buying distressed assets, hasn’t been buying them because of this massive uncertainty as to what these things are worth,” Snow said.
  • Guarantees “might energize the private sector to begin putting in capital.” Snow, 69, said a public auction of soured assets -- “put them on the Internet,” he suggested -- would help investors study them and determine their value.
  • Paul O’Neill, secretary from 2001 to 2003, said in a separate interview that “a significant part of the problem we have now is the suspicion the markets have that everything is poison.” ... calling it “folly to try to value things that can’t be valued.” He said a new accounting method to quarantine bad assets might be a way out. “I know there’s not an accounting category for ‘quarantine,’ but I think this set of issues we have is worthy of creating a new category called ‘we don’t know,’” [O’Neill] said. “If I were running the Treasury, I would insist that everybody lay it out there and we can all work from the same set of facts." ... “If assets can’t be valued, they can’t be valued,” O’Neill said “So why don’t we admit that and why don’t we figure out a way not for the taxpayers to take on the burden but in effect put them in a quarantine account?” O’Neill said. “We’re frozen in place by conventions.”

I find it significant when former leaders speak out on an issue, particularly when their term was far enough back that they may be able to assess a situation without taking it personally. It will be interesting to see if any of Snow or O’Neill’s ideas play out in today’s Financial Stability Plan announcement.

O’Neill in particular has been outspoken. In an interview on NBC’s Meet the Press in October, 2008 he said of the factors leading up to the economic turmoil, “In general, the system lived in fantasy land.” Another interesting observation, 8:45 minutes into the interview, O’Neill said, “You know, I haven’t heard anybody say in this campaign, the 10,000 page Tax Code that we have is proof that we’re not an intelligent people.”

Some of you may not know that prior to becoming Secretary of the Treasury – in addition to his prior role as Chairman and CEO of Alcoa, O'Neill served as a member of what was then called the Public Oversight Board or POB, the (pre-Sarbanes-Oxley) precursor to the Public Company Accounting Oversight Board. Interestingly the POB’s website is still available at, which notes that it was founded in 1977 and terminated in 2002 when it transferred its responsibilities to the PCAOB.

O'Neill is also known for his association with rock star Bono of U2 in traveling the globe to address issues like world hunger when he served as Secretary of the Treasury; here’s a photo of O’Neill and Bono in 2002.

Looking through U2’s discography to see if there was an appropriate theme song for today’s pending announcement of the Financial Stability Plan, I believe people are hopeful - particularly with information gleaned from the triumvirate of oversight bodies charged with oversight of the TARP (GAO, COP, and the Special Inspector General) – that we are past the point of I Still Haven’t Found What I’m Looking For.

Therefore, in honor of the past and present Secretaries of the Treasury, I choose as a theme song for today’s post U2’s Stuck in a Moment You Can't Get Out of. First, its reminiscent of O'Neill's statement quoted in the Bloomberg article above: “We’re frozen in place by conventions.” Second, in contrast with the song's title, the lyrics actually talk about taking charge, and being confident that things will get better.

An excerpt from the lyrics appears below.

I'm not afraid of anything in this world
There's nothing you can throw at me that I haven't already heard …
You gotta stand up straight,
carry your own weight
These tears are going nowhere, baby
You've got to get yourself together
You've got stuck in a moment and now you can't get out of it
Don't say that later will be better now you're stuck in a moment
And you can't get out of it…
And if the night runs over
And if the day won't last
And if our way should falter
Along the stony pass…
It's just a moment
This time will pass

I don’t think that message is so different from the President’s closing remarks at his press conference last night, when he said: “I am the eternal optimist. I think that over time people respond to civility and rational argument. I think that's what the people of Elkhart and people around America are looking for. And that's what I'm -- that's the kind of leadership I'm going to try to provide."

Saturday, February 7, 2009

Suspend Disbelief: How Fair Value Accounting Could Be Modified For Geithner's Plan

[UPDATE Sun. night Feb. 8, 7pm: U.S. Treasury Secretary Tim Geithner will present a speech outlining a new comprehensive financial stability plan on Tuesday, Feb. 10 - pushed back from the original date announced by the Treasury Department of Mon Feb. 9 - as noted by Assistant to the President for Economic Policy Larry Summers on ABC News earlier today. As described in Bailout Announcement Pushed Back to Tuesday on "With Congress wrangling over the details of the $800 billion-plus stimulus package, the Treasury Department said on Sunday that it would cede the political stage to those negotiations and delay until Tuesday the rollout of the Obama administration’s multibillion dollar plan to assist the nation’s troubled banking system." Geithner is also scheduled to testify before the Senate Banking Committee and the Senate Budget Committee this week, according to the U.S. Treasury Department's Public Engagement Schedule released on Friday.]

Citing a “well-informed source,” Albert Bozzo of CNBC reported Friday night that Geithner’s financial stability plan “will include an aid package for the banking industry.”

Plan Expected to Include Ring Fence, Bad Bank
CNBC’s Bozzo further explains in Treasury’s Geithner to Unveil Financial Plan Monday [as noted in the UPDATE above, now scheduled for Tuesday] that:

  • the banking component of the rescue plan will be "smaller" than originally expected
  • the plan will include some "bad bank" component [i.e. in which the government purchases ‘toxic assets’ such as mortgage-backed securities from banks, leaving them – the good banks - with less risky assets, and placing the toxic assets in a separate entity or ‘bad bank’], and
  • the plan will be centered around government guarantees and insurance of troubled assets—what's called a "ring fence" concept.
Bozzo further reports that while there is general agreement around the ring fence concept, there is less agreement on the bad bank, adding, “Other sources told CNBC that the ‘bad bank’ would be able to buy up to $500 billion in troubled assets from financial institutions.”

Why Fair Value (Mark-to-Market) Accounting Could Impact Bailout
“At this point, the Obama administration appears to have settled on the most controversial aspect of the bad bank: pricing the toxic debt,” reports CNBC’s Bozzo. He explains in broad terms how the pricing mechanism is expected to work, and the fact that accounting rules may be modified to retain the desired benefit of setting up the bad bank without triggering unintended consequences.

Citing once again his unnamed source, CNBC's Bozzo states:

  • The government will buy toxic assets below the banks' ‘carrying value,’ which is basically market value, but not at fire-sale levels, the source said, representing something of a compromise.
  • Such a pricing approach will likely placate both taxpayer and Congressional concerns about the government overpaying for the assets.
  • But, the source noted, it could ‘trigger an accounting problem for the banks,’ presumably because the institutions will have to report a loss on the transactions.
  • The Obama administration is now working on ideas to address that, which might entail a temporary suspension of certain accounting rules. It is unclear what that might be, said the source.
Regarding Bozzo’s reference above to how the government’s purchase of toxic assets at a price below carrying or ‘book’ value could ‘trigger an accounting problem for the banks’ – to clarify, I don’t think the issue is so much about whether a particular bank selling a particular portfolio of assets into the bad bank would have to recognize a loss on the sale of those particular assets (although I could be wrong, and I welcome those with other views on this or other issues to post a comment on this blog). Although those losses will likely be huge, there would presumably be an offsetting gain in confidence – by investors and depositors - in the strength and stability of the remaining ‘good bank’.

I do, however, believe there is a significant issue to be addressed with respect to the application of FASB Statement No. 157, Fair Value Measurement, on the remaining portfolio of similar assets in the particular banks that transact with the government as part of the bad bank plan, and more broadly, on all other entities holding similar assets. That is because FAS 157 requires a ‘market participants’ or ‘exit value’ approach to valuing assets that are required by U.S. Generally Accepted Accounting Principles (U.S. GAAP) to be recorded at ‘fair value.’ [Note: FAS 157 does not specify which assets or liabilities must be recorded at fair value - it only specifies how to determine fair value - other accounting standards issued before or after FAS 157 set forth the measurement basis (e.g. historical cost, lower of cost or market, or fair value) for particular types of assets, liabilities, transactions or events.]

FAS 157 not only requires entities to look to current market transactions as being indicators of fair value, it requires entities to consider the price that would be obtained in a hypothetical transaction in current markets, when there is a dearth of actual transactions. The requirement to look to a current or hypothetical market price – as applied even in the current illiquid markets – has been the central criticism of FAS 157 for over a year.

Published in September 2006, roughly a year ahead of the market downturn, FAS 157 became effective in fiscal years beginning after November 15, 2007, just as the subprime crisis and its broader effects on the housing, credit, and stock markets accelerated. This point about when FAS 157 was issued vis-à-vis the then-unforseen financial crisis which arose, some say, from a perfect storm of black swan or unlikely events, is extremely significant in why I, for one, believe that some modification of FAS 157 may not be that outlandish of an idea.

But, its not just because of unforeseen events that I have this view - i.e. I do not believe accounting standards are made for when the sun shines, only to be abandoned in a storm; no, my belief is also due in significant part to the very wording underpinning FAS 157, which you can find by reading the 3 page Summary at the beginning of FAS 157, right below the subheading “Differences Between This Statement and Current Practice” which says:

  • The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. This Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability.

The key term, ‘orderly transaction,’ is defined in para. 7 of FAS 157 as follows:

  • An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale).
'Forced' or 'distressed' transactions are addressed in para. 17 of FAS 157 as follows:

  • [A] transaction price might not represent the fair value of an asset or liability at initial recognition if… [t]he transaction occurs under duress or the seller is forced to accept the price in the transaction. For example, that might be the case if the seller is experiencing financial difficulty.

Now, take a look at the Timeline-Financial Crisis, to put the timing of issuance of FAS 157 into perspective.

And that brings us to today: New U.S. Plan to Help Banks Sell Bad Assets (NYT, Feb. 7, 2009); Treasury Plans More Expansive Approach to Financial Rescue (WSJ, Feb. 7, 2009); and the article we opened with: Treasury’s Geithner to Unveil Financial Plan Monday (CNBC Feb. 6, 2009).

The role of accounting – fair value accounting specifically (also called mark-to-market, although there are some technical differences between the two terms, the level of similarity is such that the terms are used interchangeably by the general public) – may be key to the success of the bailout; however, a number of articles in the past couple of days have reported conflicting views on whether any action will be taken to ‘suspend’ fair value accounting. See, e.g. the first report circulating on Thursday afternoon Feb. 5, Wall St. Jumps on Bank Accounting Talk (Reuters, via, Feb. 5, 2009), and a later report circulating Thursday night, SEC, Treasury Not Discussing Suspending Fair Value (Reuters, Feb. 5, 2009) which appeared to refute the earlier report. However, maybe too much emphasis is being placed on the lightning rod word of ‘suspend[ing]” fair value. I think any suspension of fair value is DOA. But, there may be room for some ‘modification’ of fair value. If you read the words attributed to Senator Chris Dodd, Chair of the Senate Banking Committee, as quoted in the articles, he was talking about a ‘modification,’ not a ‘suspension,’ so don’t let the inflaming term ‘suspension’ used in some headlines get the better of you in trying to understand what may lie ahead.

The second article cited in the paragraph above said:

  • Key policymakers have suggested that the rule could be amended. Sen Christopher Dodd, the Democratic chairman of the Senate Banking Committee, said it might be possible to modify fair value accounting rules for banks facing steep write-downs of troubled assets without abandoning the underlying accounting standard. Dodd told reporters on Wednesday evening that at least one former bank regulator was discussing how to approach the difficult issue without "walking away from" fair value (also called mark-to-market) standards.

[Hmm… could the unnamed ‘former bank regulator’ referenced in the Reuters article cited above, said to be looking at fair value, be former Federal Reserve Board Chairman Paul Volcker? Volcker was named yesterday by President Barack Obama to head up a new Economic Advisory Board - see yesterday’s White House Press Release, Obama Announces Economic Advisory Board, and related article in today’s Washington Post, Obama Names More Economic Advisors. I closely followed Volcker’s remarks with respect to fair value, as he described in a meeting earlier this year of the Treasury Department’s Advisory Committee on the Auditing Profession (ACAP), which I cited again at the end of my blog post Thursday evening, FASB Advisory Group Calls for Further Guidance on Fair Value.]

And, Senator Dodd's counterpart chairing the House committee overseeing these issues, Rep. Barney Frank, chair of the House Financial Servces Commitee, expressed similar views to Dodd in remarks in late October, in which he said, according to Reuters (Lawmaker Urges Flexibilty in Accounting Rule, Oct. 29, 2008):

  • "We will never legislate accounting," Frank told business leaders in Boston. But "there are modifications that we are looking at" related to mark-to-market requirements.

Given all of the above, let’s suspend any notion of a full-on ‘suspension’ of fair value, but let’s cut to the chase: if the government (i.e., Treasury or the SEC) or the private sector (i.e. FASB) were to modify fair value accounting to facilitate the aims of any potential Treasury plan which could include, as part of the plan, the movement of toxic assets into a bad bank, through the government purchasing those assets from banks at something lower than the banks carrying value (book value) but higher than a ‘fire sale’ price as described in yesterday’s CNBC article cited above - how could such a plan be accomplished, given that FAS 157 as currently written would require – in the eyes of some – use of any purchase price of those billions of dollars of bad assets by the government as a ‘market price’ for purposes of valuing similar assets left in the good bank or held at other banks, which could potentially cause a downward spiral of writeoffs, thereby potentially negating the intended effect of the good bank/bad bank program?

As noted in my summary of Thursday’s FASB Valuation Resource Group (VRG) meeting (FASB Advisory Group Calls for Further Guidance on Fair Value), even after the SEC and FASB issued guidance last fall on fair value in illiquid markets, experts on the VRG have reached a consensus that there is still undue pressure explicit or implicit in applying the words written in FAS 157 to use actual market transaction prices, even in inactive markets, since they establish third party, hard ‘evidence’ of what a ‘market participant’ would pay for an asset. These actual market prices are referred to as ‘level 1’ inputs, which are the favored pricing mechanism when available according to FAS 157 - i.e., direct, observable market inputs. If level 1 inputs are not available, one has to move down the FAS 157 hierarchy to ‘level 2’ or ‘level 3’ inputs and classifications – i.e. valuation methodologies which rely more on modified extrapolations of observable prices for similar assets, or modeling methods when market prices for similar assets are not observable, e.g. in thin or illiquid markets.

How Fair Value Accounting Could Be Modified

Based on the language in FAS 157 itself, (see paragraphs we cited further above from FAS 157) particularly how it defines key terms like ‘orderly transaction’… ‘usual and customary’… ‘not… forced .. or … distressed,’ I believe that some may say that the exceptional market conditions alone may be reason enough to look for something beyond business-as-usual in applying FAS 157 such that it may in fact not apply; i.e. that the current market conditions may be viewed as not matching up with the conceptual underpinnings of FAS 157 in general. However, even if that belief is viewed as a fair weather yes/stormy weather no view; there is also the fact that, as stated by some FASB VRG members earlier this week, the wording in FAS 157 does not seem to provide sufficient flexibility to move off using actual market transaction prices, even in distressed markets. And, if the government were to buy some large amount of toxic assets, that would put an ‘actual market transaction’ price out there, which is the central point of concern for some, in potentially causing downward procyclical effects if the price paid for those toxic assets were extrapolated across remaining portfolios of selling banks, and of other banks, as some believe FAS 157 would require.

Couple that with the fact that any purchase of $500 billion or some similarly scaled amount of toxic assets by the government is an extraordinary event which in and of itself, I believe, could warrant a modification of the FAS 157 for this exceptional situation.

Here are some illustrations of some potential actions we may see --based on some historical actions taken in similar situations: the SEC staff and FASB staff could issue a letter to the U.S. Treasury Department (or could simply issue a press release or an SEC Staff Accounting Bulletin (SAB) or FASB Staff Position (FSP) saying they ‘would not object’ to banks excluding from fair value determinations - the price paid by the U.S. government for toxic assets as part of the bad bank program - for purposes of valuing the remainder of the portfolio of similar assets by those banks selling into the bad bank (via Treasury or directly) or for other banks with similar assets. Or, FASB or the SEC could issue a more formal staff document. Here are some examples of how this could be accomplished:

Some may be of the view that the strongest of the three possible actions above - in terms of standing up to second guessing by auditors, regulators, the plaintiff’s bar or others, may be for FASB to issue an FSP (following their due process, with a proposed FSP first) - that way the modified treatment would be embedded in U.S. GAAP itself.

Such an FSP could modify FAS 157 for the extraordinary circumstance not only of the current economic crisis vis-à-vis the language regarding ‘orderly’ transactions and ‘distressed markets’ but moreover to establish that a $500 billion (or some similar amount, on the order of billions - the precise dollar amount does not need to be cited in the SEC/FASB guidance so as not to draw a bright line threshold) purchase of toxic assets by the U.S. Government under a special bailout plan is an exceptional circumstance which does not need to be referenced as a ‘market value’ for purposes of applying FAS 157 to similar assets retained by banks selling into the bad bank, or which remain in the portfolios of other banks.

The above 3 possibilities are hypothetical examples of how a 'modification' of FAS 157 could be structured by the regulators or FASB, if they were going to contemplate any such modification relating specifically to the bad bank. Other modifications may result from separate contemplation by FASB (and by the parallel international standard setting body, the IASB) based on, e.g. the recommendations made by FASB's Valuation Resource Group at its meeting last week.

As a reminder, the content of this blog represents my own personal views (unless I am specifically citing a comment letter or other document issued by FEI); I direct you to the Disclaimer box in the right margin of this blog above the Blogroll; and I invite those with other views to share them by posting a comment.


Update Sunday 2.8.09: I wanted to clarify, and thank a commenter for asking about this, that I am not saying potential modifications or improvements to FAS 157 may only be considered with respect to the specific issue of the bad bank. Although this post focuses on the bad bank issue, I would note there have been calls for improvements to be considered to FAS 157 separate and apart from the bad bank issue, including in the SEC's report to Congress on mark to market accounting issued on Dec. 30, 2008. Additionally, to be more precise on the results of the FASB VRG meeting noted above, they reached a consensus that FASB should issue further guidance on FAS 157 with respect to fair value in inactive or distressed markets; this was a general recommendation, not with respect to any particular transaction or event like the anticipated bad bank. Similarly, as noted in the Timeline-Financial Crisis linked above, FEI's Committee on Corporate Reporting (CCR) and the U.S. Chamber of Commerce's Center for Capital Market Competitiveness (CCMC) filed a comment letter with FASB on Nov.25, 2008. The FEI-U.S.Chamber letter made a formal request under FASB’s Rules of Procedure for FASB to reconsider some aspects of FAS 157 in light of information learned about application of the standard during the credit crisis.