Enjoy! Some 148 pages of accounting-for-loan-losses reading:
It’s the IASB’s latest version of its attempt to make banks recognise “lifetime expected” losses on loans or bonds as soon as there are “significant” signs of a credit going bad, instead of waiting until it’s too late and risking a sudden wave of defaults. Read more
Cast your mind back to the Valukas report into the collapse of Lehman Brothers. Back to Repo 105, and the immortal lines, “It’s basically window‐dressing. We are calling repos true sales based on legal technicalities.”
If it could be called a sale, it could be removed from the balance sheet whenever a reporting date — and inconvenient questions about leverage — threatened. Read more
Operating leases may not sound all that sexy, but they are a great way to get liabilities off balance sheet. Even better, loads of companies use ‘em! Everyone does it, from airlines to clothing stores, so no need to feel like the odd naughty one out. All it takes is a little structuring to ensure that a finance (aka capital) lease — which does significantly raise liabilities — is booked as an operating lease, keeping debt levels down.
Why then do accounting standard setters want to spoil the parrr-tay by requiring operating leases to come back onto balance sheets? Read more
Netting of the mark-to-market of derivatives positions is attractive. It’s more efficient when it comes to posting and receiving margin, decreasing the amount of operational and counterparty risk. The ultimate in netting efficiency is, of course, the newest too-big-to-fail institutions — central counterparties (CCPs) and clearinghouses.
There’s another place where offsetting positions is attractive: financial statements. It can make a big difference. Citi demonstrates this with estimates of what derivatives exposures (including repos, brokerage receivables, and associated collateral) would look like if you applied full netting instead of that dictated by respective accounting standards… Read more
Oh, those international accounting standard-setters. Such drama queens.
On Wednesday, the International Accounting Standards Board (IASB) and its US counterpart, the Financial Accounting Standards Board (FASB), held a joint meeting to discuss impairment. Read more
What the market may have overlooked in the last quarter and this one, handily written up by Florida-based accountants MBAF (back in August):
During the final months of 2011, banks will need to begin preparing for compliance with a recent Financial Accounting Standards Board requirement on the accounting treatment of repurchase agreements. Read more
In March, the US Securities and Exchange Commission fired off a few letters asking a number of America’s regional banks to clarify their loan modification practices. In particular the SEC is reportedly looking into “troubled debt restructurings” (TDRs) which involve modifying existing loans’ terms.
Just to be clear, this particular form of ‘extend and pretend‘ is 100 per cent legal, though it’s governed by some fairly nebulous accounting rules and is meant to be reported. First though, look at those TDR growth rates. In a special report out on Thursday, Fitch Ratings says reported TDRs increased 48 per cent to $106bn in 2010. The mix, however, is the really interesting (and significant) thing. Read more
Spotted on the Financial Accounting Standards Board website:
How regulators can build a market for reasonably-cheap-to-issue Contingent Convertible capital, by Barclays: Step 1) Eliminate mark-to-market accounting to ensure that asset price swings never result in a CoCo trigger being reached…
… Oh, wait… Read more
US banks have won an unexpected victory after the Financial Accounting Standards Board backtracked on plans to force them to value their loan books according to market prices, the FT reports. The Board stunned the banking sector in May when it rolled out proposals to account assets and liabilities at ‘fair value’, contrary to moves by the International Accounting Standards Board to allow loans and some other debt instruments to avoid this treatment. FASB’s change of heart will favour banks with vast loan books, like Wells Fargo or Citigroup. Looks like Fitch Ratings’ prediction of ‘condorsement’ in global accounting rules, as reported by FT Alphaville, is bearing out. For now. Read more
This is meant to be the year of accounting convergence.
You’re probably already yawning by now — but wait! This is important. Read more
A footnote, from the US Treasury’s Hamp programme.
The Home Affordable Modification Plan was created in the spring of 2009 with the stated goal of keeping delinquent homeowners in their houses. It’s now widely regarded as a failure — with just 519,648 permanent modifications completed. Read more
Retailers, airlines and ship operators may be forced to assume billions of dollars more liabilities on their balance sheets due to a radical overhaul of lease accounting proposed by US and international standard setters, reports the FT. The new rules have drawn strong protests from multinationals about more volatility in their accounts and vastly increased liabilities. The rare joint proposals from IASB and the US Financial Accounting Standards Board have also been criticised for failing to reduce complexity. The upshot, says Lex, is that investors cannot afford to “rest in lease”. Read more
The world’s top accountants will not meet the June 2011 deadline set by G20 nations to create a single global accounting standard, Bob Herz, chairman of the Financial Accounting Standards Board, the US accounting rule maker, has indicated, reports the FT. After weeks of speculation, the global accounting standards setters – the US FASB and IASB – have signalled they are reconsidering their timetable for convergence. Herz has suggested that the standard-setters could expect the convergence process – which includes about a dozen projects – to run into 2012. Read more
Tremble US financial institutions, for FASB is about to fair value your assets, FT Alphaville writes. Barclays Capital has a handy summary of the planned accounting changes, which banks say will increase volatility. Well, really? Read more
The Financial Accounting Standards Board’s new rules expanding mark-to-market accounting have drawn fire for their possible effects on volatility, according to the American Banker. The FASB wants banks to value loans they intend to hold in much the same way as for loans they want to sell. If the change is approved by a rules panel, dramatic revisions to banks’ balance sheets could follow, the WSJ says. Read more
Bye bye FAS 157, hello Topic 820, as the Financial Accounting Standards Board moves to tackle mark-to-market. But, FT Alphaville writes, it may come at the cost of confusing different classes of asset valuation. Read more
The US Securities and Exchange Commission is considering new rules to stop financial institutions from obscuring their risk and leverage levels using so-called Repo techniques, the Wall Street Journal reports. Mary Schapiro, SEC chairwoman, made the disclosure at a hearing of the House Committee on Financial Services on Tuesday. Reuters also reports the US accounting standards board, FASB, will consider whether to change the accounting rules which govern the use of Repos after the SEC finishes its review. Read more
Fair value –or mark-to-market — accounting is back in the news, FT Alphaville finds, as standards boards in the US and Europe dispute over its value. So what role, if any, did fair value accounting play in the crisis? Read more
FT Alphaville traces the dark origins of Lehman’s Repo 105 – including a GAAP-free trip to London law firms. Read more
No adjustment should be applied to remove from the Common Equity component of Tier 1 unrealised gains or losses recognised on the balance sheet.
Thus read the Basel Committee’s recommendations for strengthening the banking sector, released last month. Read more
Citi has never been a paragon of accounting standards, so it’s with little surprise that we read the latest work from the oft-controversial Bloomberg columnist, Jonathan Weil.
Weil has been a vehement critic of Citi, in particular on the subject of the bank’s deferred tax credits — a debate which helped kick off something of a revolution in bank capital. Read more
“Accounting changes must be coordinated,” ran headlines on Fed Governor Elizabeth A. Duke’s Monday speech.
In actuality Ms Duke went much further — not only suggesting that the world’s two major accounting bodies, the International Accounting Standards Board and the Financial Standards Board of the US, need to coordinate — but that their proposals for accounting changes are in danger of eradicating traditional banking. Read more
Amid all the accounting-related chicanery currently taking place, the one below, we think, has been flying rather under the radar.
From Asset-Backed Alert: Read more
Phew. That was close.
The Financial Crisis Advisory Group has come out and said it — accounting rules were not the root cause of the financial crisis. Read more
Pity the accounting boards trying to come up with new fair value, or mark-to-market, accounting rules, with industry feedback like below.
It’s from Valuation Research, which undertook a survey on attitudes towards fair value accounting. The report, completed in May, examines the fair value opinions of financial professionals from accounting, investment banking, private equity, hedge funds, law and consulting backgrounds. Read more
Behold the International Accounting Standards Board’s proposed revisions to IAS 39.
IAS 39 being an accounting principle at the centre of much controversy in recent months and even years. The standard sets out how to value financial instruments, among other things, and the debate is essentially another mark-to-market one. Read more
Off-balance sheet vehicles — qualified special-purpose entities, or QSPEs — were blamed by many for fuelling the financial crisis: helping banks hide their true leverage and avoiding regulatory capital requirements. Small wonder then, that the US Financial Accounting Standards Board, the FASB, were keen to address the issue. However, as was the case with the recent mark-to-market debate, the FASB are encountering a not inconsiderable amount of pressure from the financial industry.
From the Wall Street Journal: Read more
For an insight into the kind of lobbying that took place before the US Financial Accounting Standards Board agreed to ease mark-to-market rules, we direct you to this 2,180-word Wall Street Journal story (H/T Felix Salmon).
The whole thing is a rather unsettling peek into the push and pull mechanics that exist between legislation-making and the banking industry. For instance, in it we’re told that financial firms grouped together to press legislators and the Board, or FASB, collectively spending $27.6m to lobby on the issue. They also donated some $286,000 to legislators on a key committee, many of whom pushed for the rule change, according to the WSJ. Read more
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