AFP Blogs

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) published for public comment a joint Exposure Draft (ED), Conceptual Framework for Financial Reporting: The Reporting Entity. The goal is to develop a common and improved conceptual framework that provides a sound foundation for developing future accounting standards. The ED discusses what constitutes a reporting entity, which in different situations could be a group of entities, a single entity, or only a portion of an entity. Comments will be accepted through July 16, 2010.

Senate Banking Committee Chairman Chris Dodd (D-CT) unveiled a new bill to systematically reform the financial regulatory structure of our nation’s capital markets. The Restoring American Financial Stability Act attempts to “create a sound economic foundation to grow jobs, protect consumers, rein in Wall Street, end too big to fail institutions, and to reform the financial regulatory system”.  Chairman Dodd released both a summary describing the bill, as well as the full text of the 1,300+ page legislative language.  Senator Dodd has announced that he will entertain a substantive amendment to the derivatives section of this bill.  It is very likely that the derivatives language included in this bill is not the final version.

AFP staff is currently digesting the contents of the bill and will provide analysis on areas of importance to AFP members.  Be sure to check AFPonline.org for additional stories on regulatory reform. Or, contact me at jarnett@AFPonline.org.

The FASB clarified the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements with Accounting Standards Update 2010-11.　Only one form of embedded credit derivative qualifies for the exemption and that is one related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. An entity must apply the amended guidance as of the beginning of its first fiscal quarter beginning after June 15, 2010.

Fair Value  — The two Boards are planning to create educational materials for measuring fair value of difficult-to-value assets and liabilities will be developed to address concerns raised by entities in emerging and transition economies about applying such principles in their jurisdictions. The material will include case studies and examples to help constituents not used to applying concepts of the guidance think through problematic issues.

Financial Presentation –The Boards also discussed their proposed guidance on financial statement presentation. The Boards tentatively favor requiring full retrospective application upon adoption. Under the proposed accounting guidance, financial statements will be required to be cohesive, contain disaggregated information, and make a company’s liquidity and financial flexibility more transparent to users. As part of transition requirements, their proposal will include requiring entities to apply the new presentation guidance to previously issued financial statements which would entail for each prior period the following: reclassifications, new groups, and disaggregation of comparative information presented and disclosed as if the new presentation provisions had always been applied.

SEC/IRS Enters MOU on Municipal Securities

The Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC) entered into a memorandum of understanding (MOU) stating their intention to work cooperatively to identify issues and industry trends within the tax exempt bonds/municipal securities industry and to develop strategies to enhance performance of their respective responsibilities. Tthe IRS and SEC have agreed to inform the other in advance, where feasible and otherwise as soon as practicable, of issues that may affect the interests of the other party as they pertain to tax exempt bonds/municipal securities. Such information may include, but is not limited to, market risks, practices, and events relating to tax exempt bonds/municipal securities that may be of interest to the other agency.

The Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB) support the SEC’s view that a single set of high-quality globally accepted accounting standards will benefit U.S. investors.  The FAF and FASB support the SEC’s further consideration of the issues identified in the “work plan” in making its determination on whether and how to transition the current financial reporting system for U.S. issuers to a system incorporating International Financial Reporting Standards (IFRS). The FAF and the FASB stand ready to fully assist the SEC as it works toward a decision next year.

This was another week where uncertainty was the name of the game.

We continued to receive unsettling news from the Aegean. The tug-of-war between Greece and the EC is ongoing. We learned that the credit rating agencies were considering further downgrades to Greece. Credit spreads widened and the CDS market continues to price in a higher likelihood of a default event. The European economies with similar debt and growth characteristics (affectionately referred to as the PIGS) saw their credit profiles also deteriorate. Questions about the survivability of the Euro continue to be raised.

In the US, the release of several weak economic numbers added to the feeling that the economic recovery is tepid as best. When the news from Europe and Chairman Bernanke’s comments were added into the mix, the result was that the Treasury market rallied for the first time in three weeks. Investors continue to seek the safety of the US government market and the greenback.

The market now believes the Fed is less inclined to raise the Fed Funds rate prior to the beginning of 2011. The futures market is now pricing in the probability of a tightening of interest rates at 50/50 by November.

All of this uncertainty has had a significant impact on the debt markets. We just concluded the quietest February for debt issuance since 2002. Even with corporate bond yields at their lowest levels since September 2005, we continue to witness debt and equity deals being cancelled and postponed due to market volatility.

One potential sign of an improving situation has been the recent growth in the commercial paper market. The CP market has now grown for the past three weeks. Since January 6^th, the CP market has grown by 7.3% or $78.1 billion.

The market’s eyes will be focused on the upcoming employment reports. Unfortunately, with the severe weather we have been experiencing, there is a high likelihood that any report will be tainted with weather related revisions in the future.

We will all have to remain vigilant as events around the world continued to develop.

On February 25th, the Department of Labor’s Employee Benefits Security Administration released a final rule establishing a civil penalty of up to $1,100 per day against multiemployer plans in endangered or critical funding status that fail to establish mandatory funding improvement and rehabilitation plans.

“The regulation makes clear that the $1,100/day penalty can be reduced or waived based on mitigating circumstances, in particular the severity or willfulness of the violation,” Judith F. Mazo, senior vice president and director of research for the Segal Co., told BNA Feb. 25.

The rule is effective March 29 for plan years beginning on or after Jan. 1, 2008 and is expected to be published in the Feb. 26 Federal Register.

At the Credit Card National Association’s annual government affairs conference held this week, House Financial Services Committee Chairman Barney Frank (D-Mass.) suggested that there it is unlikely that legislative action will be taken in 2010 that would limit interchange fees on credit cards and other payment cards.

According to a recent PwC IFRS survey, nearly 50% of US-based multinational companies are either currently using IFRS somewhere in the world, have completed an initial impact assessment, or are planning to do an assessment.

This week Federal Reserve Chairman Ben Bernanke signaled that the central bank would not change its key interest rate policy in the near term. Chairman Bernanke indicated that the current zero to 0.25 percent target range for the federal funds rate will remain in place for some time to come. He cited ongoing labor market problems and low inflation as reasons to maintain such a position despite continuing signs of broader economic improvements.