U.S. Banks Fight Proposed Accounting Standards through IASB and FASB

U.S. derivatives accounting at odds with foreign rules
* Some bank balance sheets could nearly double
* Changes on FASB's board cloud proposal's future
Wall Street's biggest banks are urging rule-makers to scrap a derivative accounting proposal that could inflate their balance sheets by trillions of dollars.
The draft rules, unveiled by the Financial Accounting Standards Board in January, would force banks to report their full exposure for most derivatives on their balance sheets, instead of net amounts.
In a worst-case scenario, S&P 500 companies might have to bring nearly $7 trillion in derivatives onto their balance sheets if no netting is allowed, according to a report by Credit Suisse.
About 97 percent of that would come from five big banks: Bank of America Corp (BAC.N), JP Morgan Chase & Co (JPM.N), Citigroup Inc (C.N), Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), according to the report. Derivatives are a big source of revenue for banks.
The proposed rules are meant to harmonize U.S. accounting standards with their international counterparts. But with new board members at FASB, the future of the proposal is uncertain.
In letters to FASB, banks complained that the change would exaggerate risks. In practice, banks typically have legal agreements in place that allow them to net, or offset their derivative positions against one another, so they are not exposed to losses on gross amounts, banks said.
"The flawed offsetting model in the exposure draft will either obscure or create nonexistent risks which will ultimately mislead financial statement users," Robert Traficanti, deputy controller at Citigroup, wrote last week.
The accounting proposal could also make it hard to net derivatives traded on clearinghouses, banks complained. One requirement for netting is that derivatives be settled simultaneously; but on a clearinghouse, derivatives are often settled in batches throughout the day.
"There is certainly concern right now about how those rules are written, and justly because there are significant implications," said Lisa Filomia-Atkas, a partner at Ernst & Young.
U.S., INTERNATIONAL RULES AT ODDS
Derivatives have come under scrutiny by regulators worldwide since the global financial crisis. Many investors complain that banks' exposures are opaque, making it difficult to determine exactly how safe a lender is.
Accounting treatment for derivatives differs sharply, with netting allowed for most derivatives in the United States but not under International Financial Reporting Standards.
Leaders of the top 20 world economies have been pushing rule-makers to iron out accounting differences.
The proposed rewrite, a joint effort of FASB and the International Accounting Standards Board, would restrict netting to limited circumstances.
"It certainly will be very onerous to meet all the netting requirements in the proposal," said Olu Sonola, director of credit policy at Fitch Ratings. "In its current form, the bar is very high."
The American Bankers Association, a lobbying group, argued that banking analysts rarely use gross amounts to figure out a company's risks. Balance sheets should report the net information, with gross amounts in footnotes, it said.
Some accounting experts, however, said it is important to see the total derivative amount on the balance sheet.
"Netting just doesn't give you a fair representation of what the company's full asset and liability exposure is," said Charles Mulford, accounting professor at Georgia Institute of Technology.
Changes on FASB's board have clouded the future of the proposed rule, which passed by a 3-2 vote. Former FASB Chairman Robert Herz, who voted for it, has resigned and been replaced as chair by Leslie Seidman, who opposed it. The board also has three new members, "so anything could happen," Fitch's Sonola said.

Accounting Standards Boards of Japan, U.S. Consider Global Convergence

Representatives of the Accounting Standards Board of Japan (ASBJ) and the Financial Accounting Standards Board (FASB) met Feb. 7 and Feb. 8 in Norwalk, Conn. This meeting was the 10th in a series of discussions between the ASBJ and the FASB designed to enhance dialogue between the two boards in their shared pursuit of global convergence of accounting standards.

In November 2010, the FASB and the International Accounting Standards Board (IASB) issued a joint statement, Progress Report on Commitment to Convergence of Accounting Standards and a Single Set of High Quality Global Accounting Standards, which affirmed their priority projects. The decisions connected with the use of IFRSs are expected to be made during 2011 for the United States and in or around 2012 for Japan. With those decisions in sight, both the ASBJ and the FASB are vigorously conducting their respective convergence programs with the IASB.

“As the decisions connected with the use of IFRSs in both countries approach, it is extremely meaningful to exchange views with the FASB regarding financial instruments, revenue recognition, leases, and the measurement of liabilities, most of which are high priority MOU projects between the FASB and the IASB,” said Ikuo Nishikawa, chairman of the ASBJ. “I am pleased that we were able to affirm our continuing relationship between the ASBJ and the FASB under the leadership of newly appointed Chairman, Ms. Leslie Seidman. The ASBJ will continue to contribute to the development of high-quality, global accounting standards.”

At this meeting, the ASBJ and the FASB updated each other with the recent developments in their respective convergence projects with the IASB. They exchanged views on the following projects:

• Financial instruments (based on the credit impairment model for financial assets recently deliberated by the FASB and the IASB and the Exposure Draft on Hedge Accounting issued by the IASB in December 2010)
• Revenue recognition (based on the FASB and the IASB’s recent redeliberations with respect to the Exposure Draft on Revenue Recognition)
• Leases (based on the FASB and the IASB’s recent redeliberations with respect to the Exposure Draft on Leases)

The ASBJ and the FASB also exchanged views on issues related to reflecting the current interest rate in the measurement of liabilities, as a cross-cutting issue.

“The FASB iscommitted to working cooperatively with the ASBJ on important issues related to the international convergence of accounting standards,” said Chairman of the FASB Leslie Seidman. “Our dialogue on major joint projects with the IASB, and our shared interest in international convergence, are important to ensuring the future of high-quality financial reporting in both Japan and the United States.”

The next joint meeting is planned in the summer of 2011 in Tokyo, Japan.

The Accounting Standards Board of Japan (ASBJ) was established in July 2001 as a private-sector organization. Accounting standards developed by the ASBJ are to be authorized by the Financial Services Agency as part of generally accepted accounting principles. The ASBJ develops accounting standards and implementation guidance that appropriately reflect the environment in which business enterprises operate. The ASBJ also communicates with corresponding organizations abroad and contributes to the development of global accounting standards. For more information about the ASBJ, visit its website at https://www.asb.or.jp/asb/top_e.do.

Since 1973, the U.S. Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting and reporting in the United States. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information. For more information about the FASB, visit its website at http://www.fasb.org/.

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