AFP Blogs

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.

Debt markets are not complicated. In fact, one expert says they are getting simpler with time.

“If anything, the debt world has been really dumbed down over the last decade,” says Andrew Kalotay, PhD, an authority on institutional debt management and fixed-income valuation. “There used to be more types of bonds issued and much of them on the corporate side have disappeared. Today, you would be hard pressed to find a single callable bond.”

Kalotay will lead “What Every Corporate Debt Manager Should Know,” a one-hour webinar for AFP members, April 15, 3:30 ET. Corporate treasury professionals can hear Dr. Kalotay discuss new issue structuring, debt retirement and hedging.

“Whether a swap or bond, think about the product as something to manage over time, cradle to grave, and contemplate contingencies,” says Kalotay. “Often corporates use them as a hedging transaction. They get a presentation that talks about locking in the interest rate but the transaction cost is not mentioned. The bid ask spread is narrow when you enter and quite wide when you get out.”

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.

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.

While Washington, D.C., and most of the northeastern United States tries to get back on its feet after suffering through what has been the snowiest winter since William McKinley was president, the rest of the world was focused on events in Europe (specifically Greece), and China.

Signs that the European Union (EU) will provide some sort of support and aid to Greece was enough to create a bit of a floor for the troubled sovereign credit and the Euro itself. After the freefall of credit spreads, CDS, equities, commodities and currencies over the past couple of weeks, this week actually seems calm.

We will have to take a wait-and-see approach to developments in Europe. How the EU would response to a further deterioration of the situation is foremost on people’s minds.

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Back in 2002, when the University of Maryland was making its run at the NCAA men’s basketball championship, the term “Fear the Turtle” became popular. It was a reference to the less-than-frightening school mascot, the Terrapin. This week, a significantly more frightening chant heard around the world, which was “Fear the PIGS”. With the “PIGS” being a reference to the countries of Portugal, Ireland and Italy, Greece and Spain.

We witnessed a great bit of uncertainty in the global markets as participants around the world were greatly concerned about the potential of a credit event in one or more of these European Community members. We watched as absolute credit spreads and credit default spreads continued to widen and as debt and equity deals were delayed and postponed.

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To paraphrase Frankie Valli and the Four Seasons, the word of the week is “Greece”. Concerns about the financial stability of the Greek economy were the focus of the global capital markets. Because Greece is a member of the European Community (EC), questions have been raised about the value of the currency, the riskiness of credit in Europe and the impact on the potential growth of the European economy.

Unlike 2009, when the general feeling was that all the economies were slowing down as a result of the financial crisis, 2010 is already shaping up as a year where individual countries’ economies will not be moving in such lockstep.

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