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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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March 4, 2009 4:12 PM ET
The Financial Crisis Advisory Group, formed by the Financial Accounting Standard Board and the International Accounting Standard Board to respond to the global financial crisis, will hold its third meeting Thursday. The group will delve further into hot topics such as off-balance sheet accounting and how to combine provisioning for loans with accounting principles. But most likely at the top of the list: fair-value accounting. Indeed, the advisory group will look at whether additional guidance on fair value is needed—and if so, what that guidance might entail. While some believe more info on mark-to-market accounting is necessary when markets are illiquid, others are concerned that additional guidance could lead to rules that would limit the use of judgment, according to a discussion paper prepared for the meeting. Critics have blamed fair-value accounting as one of the causes of the financial crisis. They say that it has created a vicious cycle forcing financial institutions to sell assets at fire-sale prices. The advisory group will also look at the accounting and reporting of off-balance sheet activities. The FCAG members think off-balance sheet rules have been even more detrimental to financial stability than fair value. The group will try to figure ways to provide useful information on securitizations and other structured entities, particularly in cases when only a portion of assets has been transferred by an entity that retains a partial interest in those assets. One possible change: sponsoring entities could be allowed to consolidate the assets that were securitized. The advisory board will also look into recommending that filers enhance disclosure to provide additional information to users of financial statements. In addition, the advisory group will also pick up from its last meeting in mid February when it’s members discussed various approaches to loan provisioning for regulatory and financial reporting purposes. In that meeting, advisory members agreed that it isn’t the primary responsibility for accounting standard-setters to support financial stability. Instead, accounting rules should merely reflect economic reality—although financial statements can support regulators who require higher provisions by financial institutions during certain periods of an economic cycle. The advisory group will continue to discuss how best to marry the two goals. For instance, one proposal focuses on the creation of a reserve as an allocation of retained earnings that may be aimed by regulators at ensuring adequate capital for bad times by limiting stock buybacks or distributions during good times. Such a system would need to be disclosed appropriately to financial statement users in both the presentation of a company’s statement of equity and in a footnote explaining the provision related to the economic cycle, the discussion paper said. But a member of the Basel Committee on Banking Supervision who is also an official observer on the advisory board, expressed concerns about relegating such reserves to equity allocations outside of earnings. He also noted that such an approach might not being sufficiently transparent. “Accordingly, she indicates that central bankers and regulators would prefer that accounting standard setters change the accounting standards/framework to enable such reserve build-up and use to flow through profit or loss,” according to the discussion paper. Another topic on the FCAG’s agenda: maintaining the independence of accounting standard setters while still seeing to it that those standard setters can respond promptly to financial emergencies. Such a situation was illustrated last year, when IASB was forced by Europeans leaders to modify IAS 39 on financial instruments. IASB had to reclassify some instruments—and as a result avoid the use of fair value in some instances—without following the normal consultative process to change accounting rules.
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