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.
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Tuesday, May 10, 2011
Monday, May 9, 2011
FASB Chair Answers Push for Private-Company GAAP
Prompted by a proposal earlier this year by a blue-ribbon panel on the future of private-company accounting standards — a proposal that includes giving oversight of those standards to a brand-new board — the Financial Accounting Standards Board has heightened its focus on private-company issues, according to Leslie Seidman, the board's chairperson.
Seidman chose the prestigious Zicklin Center Financial Reporting Conference at Baruch College in New York on Thursday to respond to the challenge from the panel. Declaring that she hopes the responsibility for private-company financial reporting remains squarely in FASB's hands, she noted that the decision about how to respond to the panel's proposal is being deliberated by the Financial Accounting Foundation, FASB's parent organization. (Ironically, the FAF, along with the American Institute of Certified Public Accountants and the National Association of State Boards of Accountancy, established the panel.)
In January the panel recommended that the FAF "create a separate accounting standards board . . . with the ultimate standard-setting authority to determine and set exceptions and modifications in [generally accepted accounting principles] for private companies." Rather than proposing the creation of a separate version of GAAP for private companies, however, the panel recommended that accounting standards for nonpublic companies be based on existing U.S. GAAP "but with exceptions and modifications that would result in financial statements that provide relevant, decision-useful information that meets the needs of users of private company financial statements in a cost-effective manner."
Seidman acknowledged hearing concerns about the relevance of GAAP to private companies and complaints that current accounting standards are "overly complex for [private company] stakeholders." The FASB chair said she "strongly support[s]" the panel's short-term recommendations related to process changes, including considering a delay for private companies of the effective date of major new standards. In fact, Seidman noted, FASB has implemented or is in the process of implementing practically all of the short-term recommendations.
For instance, the panel recommended that FASB fill at least one of its then-open board positions "with individuals who have primarily private company background and experience." In a footnote, the panel acknowledged that FASB had done that and more. On January 14, the board named two board members: Daryl Buck, who spent 18 years as CFO of Reasor's Holding Co., a private company with $400 million in annual sales, and R. Harold Schroeder, who "has substantial experience as a user of financial statements, including financial statements of private companies," in the words of the panel's proposal.
Another of the recommendations was that the differences in GAAP for private companies be based on a framework, or set of decision criteria. Seidman noted that FASB's staff has begun developing such a "differential framework" in the form of a white paper on the unique needs of the users of private-company financial statements.
Noting that she "strongly hopes" FASB ends up being the governing body, Seidman said that any standard-setter must come to grips with the question of how much of GAAP should be altered to meet the needs of private-company stakeholders. If that doesn't happen, "any effort is doomed to fail because there will be an ongoing expectation gap," she warned.
In developing the framework, FASB's staff is looking primarily at potential differences in the disclosure needs of financial-statement users of public and private companies. "If you accept the premise that the investors in a private company have ready access to management," said Seidman, "maybe they don't need as much disclosure." The staff is also considering the unique needs of preparers of private-company financials and is mulling cost-benefit analyses in that context, according to Seidman.
Also speaking at the conference was James Kroeker, chief accountant of the Securities and Exchange Commission. "A number of areas of additional research, study, and outreach — particularly to investors — would be warranted prior to implementing any significant structural change" in financial reporting for private companies, he said.
Seidman chose the prestigious Zicklin Center Financial Reporting Conference at Baruch College in New York on Thursday to respond to the challenge from the panel. Declaring that she hopes the responsibility for private-company financial reporting remains squarely in FASB's hands, she noted that the decision about how to respond to the panel's proposal is being deliberated by the Financial Accounting Foundation, FASB's parent organization. (Ironically, the FAF, along with the American Institute of Certified Public Accountants and the National Association of State Boards of Accountancy, established the panel.)
In January the panel recommended that the FAF "create a separate accounting standards board . . . with the ultimate standard-setting authority to determine and set exceptions and modifications in [generally accepted accounting principles] for private companies." Rather than proposing the creation of a separate version of GAAP for private companies, however, the panel recommended that accounting standards for nonpublic companies be based on existing U.S. GAAP "but with exceptions and modifications that would result in financial statements that provide relevant, decision-useful information that meets the needs of users of private company financial statements in a cost-effective manner."
Seidman acknowledged hearing concerns about the relevance of GAAP to private companies and complaints that current accounting standards are "overly complex for [private company] stakeholders." The FASB chair said she "strongly support[s]" the panel's short-term recommendations related to process changes, including considering a delay for private companies of the effective date of major new standards. In fact, Seidman noted, FASB has implemented or is in the process of implementing practically all of the short-term recommendations.
For instance, the panel recommended that FASB fill at least one of its then-open board positions "with individuals who have primarily private company background and experience." In a footnote, the panel acknowledged that FASB had done that and more. On January 14, the board named two board members: Daryl Buck, who spent 18 years as CFO of Reasor's Holding Co., a private company with $400 million in annual sales, and R. Harold Schroeder, who "has substantial experience as a user of financial statements, including financial statements of private companies," in the words of the panel's proposal.
Another of the recommendations was that the differences in GAAP for private companies be based on a framework, or set of decision criteria. Seidman noted that FASB's staff has begun developing such a "differential framework" in the form of a white paper on the unique needs of the users of private-company financial statements.
Noting that she "strongly hopes" FASB ends up being the governing body, Seidman said that any standard-setter must come to grips with the question of how much of GAAP should be altered to meet the needs of private-company stakeholders. If that doesn't happen, "any effort is doomed to fail because there will be an ongoing expectation gap," she warned.
In developing the framework, FASB's staff is looking primarily at potential differences in the disclosure needs of financial-statement users of public and private companies. "If you accept the premise that the investors in a private company have ready access to management," said Seidman, "maybe they don't need as much disclosure." The staff is also considering the unique needs of preparers of private-company financials and is mulling cost-benefit analyses in that context, according to Seidman.
Also speaking at the conference was James Kroeker, chief accountant of the Securities and Exchange Commission. "A number of areas of additional research, study, and outreach — particularly to investors — would be warranted prior to implementing any significant structural change" in financial reporting for private companies, he said.
Tuesday, May 3, 2011
Energy Deals Derailed by Obscure Accounting Rule
Nearly a decade after the most elaborate exercise in accounting fraud in America’s history ended in bankruptcy and prison sentences, the U.S. energy industry has yet to escape Enron’s ghost.
Now, courtesy of esoteric changes in accounting standards being implemented by the Financial Accounting Standards Board (FASB), we can add energy efficiency and clean energy to the list of casualties killed in the name of transparency.
FASB and the International Accounting Standards Board (IASB) develop financial accounting standards for beancounters. In the wake of the Enron debacle, FASB launched an effort to develop new rules for the treatment of lease transactions. In December, FASB released a joint exposure draft for these new rules, which will soon be ready for prime time.
The new guidelines would alter reporting obligations for clean energy and energy-efficiency transactions. In short, businesses would have to bring all of these lease transactions onto their balance sheets. That sucks. Still worse, in the case of energy efficiency and clean energy, the rules will not necessarily benefit the public. Ironically, it may do the opposite by distorting high-priority environmental and energy security policy objectives endorsed by legislators locally and nationally.
Currently, businesses only include capital leases as assets on their balance sheets. By contrast, in an operating lease, the lessee can use an asset without having to assume the responsibility of ownership. The new rules would require all companies to list leases transactions as assets and liabilities on their balance sheets.
This requirement will significantly deter energy-efficiency investments for developers, companies and non-profits by souring the benefits of sale leasebacks and power purchase agreements (PPAs). PPAs are currently treated as service contracts. FASB’s new rule would require PPAs to be treated as leases rather than service contracts, which would appear on a company’s balance sheet.
Although the financial mechanics of these transactions will remain unchanged, companies who pursue energy efficiency or clean energy will have heavier balance sheets and risk being perceived as having higher leverage than they otherwise would. This could make debt more expensive for companies who perform lease transactions. And that is only one penalty for those who pursue clean energy or energy efficiencies who will also likely have higher tax exposure, more extensive disclosure requirements and steeper annual accounting costs.
Simply put, in the tragic tradition of regulatory overreaction epitomized by Sarbanes-Oxley, the “proposed” FASB rule will burn the barn to roast the pig.
Ironically, unlike Enron, companies and institutions investing in clean energy and energy efficiency are not trying to bake the books. Rather, they are pursuing a perfectly legitimate institutional objective – buying electricity or reducing energy costs – and outsourcing the hassle of owning the actual system. After all, most companies and institutions are not in the energy business but dependent on it.
Now, courtesy of esoteric changes in accounting standards being implemented by the Financial Accounting Standards Board (FASB), we can add energy efficiency and clean energy to the list of casualties killed in the name of transparency.
FASB and the International Accounting Standards Board (IASB) develop financial accounting standards for beancounters. In the wake of the Enron debacle, FASB launched an effort to develop new rules for the treatment of lease transactions. In December, FASB released a joint exposure draft for these new rules, which will soon be ready for prime time.
The new guidelines would alter reporting obligations for clean energy and energy-efficiency transactions. In short, businesses would have to bring all of these lease transactions onto their balance sheets. That sucks. Still worse, in the case of energy efficiency and clean energy, the rules will not necessarily benefit the public. Ironically, it may do the opposite by distorting high-priority environmental and energy security policy objectives endorsed by legislators locally and nationally.
Currently, businesses only include capital leases as assets on their balance sheets. By contrast, in an operating lease, the lessee can use an asset without having to assume the responsibility of ownership. The new rules would require all companies to list leases transactions as assets and liabilities on their balance sheets.
This requirement will significantly deter energy-efficiency investments for developers, companies and non-profits by souring the benefits of sale leasebacks and power purchase agreements (PPAs). PPAs are currently treated as service contracts. FASB’s new rule would require PPAs to be treated as leases rather than service contracts, which would appear on a company’s balance sheet.
Although the financial mechanics of these transactions will remain unchanged, companies who pursue energy efficiency or clean energy will have heavier balance sheets and risk being perceived as having higher leverage than they otherwise would. This could make debt more expensive for companies who perform lease transactions. And that is only one penalty for those who pursue clean energy or energy efficiencies who will also likely have higher tax exposure, more extensive disclosure requirements and steeper annual accounting costs.
Simply put, in the tragic tradition of regulatory overreaction epitomized by Sarbanes-Oxley, the “proposed” FASB rule will burn the barn to roast the pig.
Ironically, unlike Enron, companies and institutions investing in clean energy and energy efficiency are not trying to bake the books. Rather, they are pursuing a perfectly legitimate institutional objective – buying electricity or reducing energy costs – and outsourcing the hassle of owning the actual system. After all, most companies and institutions are not in the energy business but dependent on it.
Monday, May 2, 2011
FASB Releases Accounting Standards Update for Repurchase Agreements
The Financial Accounting Standards Board issued Accounting Standards Update No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The Update is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.
“The Board revisited its standards on transfers and servicing to respond to concerns from financial statement users who felt the criteria for determining effective control for such transactions should be improved,” said FASB Chairman Leslie Seidman. “The new guidance improves transparency by eliminating consideration of the transferor’s ability to fulfill its contractual rights and obligations from the criteria in determining effective control.”
In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets.
The amendments remove the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets from the assessment of effective control, as well as implementation guidance related to that criterion.
The ED is available at http://www.fasb.org/.
Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. 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.
“The Board revisited its standards on transfers and servicing to respond to concerns from financial statement users who felt the criteria for determining effective control for such transactions should be improved,” said FASB Chairman Leslie Seidman. “The new guidance improves transparency by eliminating consideration of the transferor’s ability to fulfill its contractual rights and obligations from the criteria in determining effective control.”
In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets.
The amendments remove the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets from the assessment of effective control, as well as implementation guidance related to that criterion.
The ED is available at http://www.fasb.org/.
Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. 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.
Midsize Companies See Growth Ahead
Growth dominates the agendas of midsize companies, a new survey by Deloitte indicates. About 80% of respondents see their company's revenues and profits growing this year, and nearly 70% plan to hire, according to the survey of 527 top managers at U.S.-based firms with between $50 million and $1 billion in revenues.
But economic uncertainty and weak market demand continue to be top concerns. Few of those surveyed expect outsized growth in the economy as a whole, with most anticipating an increase in gross domestic product of 3.5% or less. The survey results show "a great deal of optimism grounded in some level of caution," says Tom McGee, managing partner of Deloitte Growth Enterprise Services.
So where will the growth come from? The most popular growth strategy for midsize companies remains expanding within U.S. markets, named by 56% of respondents. Along those lines, about 35% said they were likely to make an acquisition in the coming year, mainly in the United States.
Source: CFO.com
But economic uncertainty and weak market demand continue to be top concerns. Few of those surveyed expect outsized growth in the economy as a whole, with most anticipating an increase in gross domestic product of 3.5% or less. The survey results show "a great deal of optimism grounded in some level of caution," says Tom McGee, managing partner of Deloitte Growth Enterprise Services.
So where will the growth come from? The most popular growth strategy for midsize companies remains expanding within U.S. markets, named by 56% of respondents. Along those lines, about 35% said they were likely to make an acquisition in the coming year, mainly in the United States.
Source: CFO.com
Monday, April 18, 2011
Monday, April 11, 2011
Signs of Optimisim
In a recent survey through Bank of America there is a generally positive and encouraging outlook for 2011 according to CFO’s. As global credit markets ease, CFO’s are taking notice. Over 60% of CFO’s are expecting revenue growth within their companies. With manufacturing and services at the forefront of the robust turnaround, many companies are looking to hire additional employees. Along with the new hires come additional R&D expenses, which will most likely push capital expenditures and borrowing needs comparable to pre-recession levels.
The majority of companies will seek financing this year. In terms of borrowing 24% of CFO’s believe their needs will increase.
*Source: Monitor Daily Feb. 2011
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