SEC Chief Accountant Kroeker, Key Player in Fair Value Negotiations, Steps Down

July 2, 2012 by · Leave a Comment
Filed under: Fair Value Accounting, SEC 

The United States Securities and Exchange Commission (SEC) announced that James Kroeker, the governing body’s chief accountant since 2009, is stepping down.

“Jim has provided superb counsel on a range of accounting- and auditing-related matters and has always stressed the importance of accounting to our investor protection mission,” said SEC Chairwoman Mary L. Schapiro.

Kroeker served as staff director of the SEC’s study of fair value accounting standards, which Congress mandated in 2008. He has led efforts to analyze the adoption of International Financial Reporting Standards (IFRS), one step that could lead to the establishment of a global accounting standard.

Kroeker’s departure is also significant because of the timing. The SEC is currently debating and completing the full analysis of bringing IFRS to U.S. public company accounting standards. Business and governmental leaders are anticipating the SEC’s analysis and decision as it would require a large shift in standards, most notably fair value accounting.

Jim is one of the good ones. He will be missed. The SEC has not announced a timetable for his replacement.

Brown: Relief From Fair Value “Essential For Community Banks to Survive”

In an opinion piece published in American Banker, president and chief executive officer of the Community Bankers Association of Georgia spoke in favor of current legislation that would “provide relief for real estate-related assets by allowing community banks to amortize losses on commercial real estate loans and ‘other real estate owned’ (repossessed properties) over 10 years for regulatory capital purposes.” The Communities First Act, first introduced to Congress in 2011, “provides a broad range of much-needed regulatory and tax relief for community banks and their customers,” said Brown.

Current mark-to-market rules under generally accepted accounting principles (GAAP) require the immediate recognition of losses.

Decoupling GAAP from regulatory accounting practices, says Brown, would allow community banks to more easily spread real estate losses over a longer period of time and give them better opportunities to work with borrowers rather than foreclose.

“Regulatory, tax and paperwork requirements disproportionately burden community banks, which lack the scale of larger institutions over which to spread legal and compliance costs,” Brown continued.

This legislation could stimulate a struggling economy by allowing small community banks to lend more easily to consumers and small businesses, many of which have limited funding options currently.

PCAOB Data: Fair Value Deficiencies Have Doubled Since 2009

June 18, 2012 by · Leave a Comment
Filed under: Fair Value Accounting 

In an analysis of Public Company Accounting Oversight Board (PCAOB) data, Atlanta-based valuation and litigation consultancy firm Acuitas, Inc. found that fair value issues dominated the recent landscape of noted deficiencies in audits. The full report titled “Survey of Fair Value Audit Deficiencies,” analyzed three years of PCAOB data regarding audits and inspections.

Mark Zyla, managing director at Acuitas, Inc., said there were two significant trends that emerged from the report. First, “the percentage of audits that have deficiencies has more than doubled since 2009. Secondly, “fair value and impairment audit issues have contributed significantly to this increase in the number of these deficiencies.”

According to Zyla, “The information contained in the survey should benefit public entities and their auditors, and by extension, private entities and their auditors – by helping them understand the underlying causes of fair value measurements and impairment audit deficiencies, as reported by the PCAOB in their latest inspection reports.”

British, U.S. Companies’ Debt Reporting Altered by Fair Value

May 14, 2012 by · Leave a Comment
Filed under: Fair Value Accounting, IASB 

In a Wall Street Journal commentary, Max Colchester discussed The Royal Bank of Scotland’s (RBS) recent reporting of a $2.46 billion (£1.52 billion) net loss, mostly due to fair value reporting on RBS’s debt. “We wouldn’t be a bank if we didn’t have some interesting accounting charge below the line,” said RBS Chief Executive Stephen Hester. Debt valuation adjustments, as they are called, theorize that when a bank’s debt loses value, the bank could buy back its very own debt at a discount, thus making it profitable.

“The ‘fair value’ of own debt conundrum continues to haunt the banking sector, making it hard for analysts to value stocks and investors to see how profitable a bank really is,” notes Colchester.

“It’s an absolute mess,” said Mike Trippitt at Oriel Securities. “At the moment we are seeing fair value gone mad with swings of £2 billion per quarter.”

American banks have recently undergone similar paradoxical results in financial reporting. Bank of America, having posted large gains in 2011 when the price of its debt fell, now is facing setbacks due to increased investor confidence and increased debt value.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have discussed rule changes to fair value accounting in attempts to merge standards. The IASB has submitted new rules for debt valuation adjustments, but they are currently being held up by European Union approval.

Slate: Fair Value Proposal Ignores Government’s Risk-Bearing Capacity

April 20, 2012 by · Leave a Comment
Filed under: Congress, Fair Value Accounting 

In a Slate editorial response to Charles Lane’s “When Uncle Sam Plays Banker” piece in the Washington Post, Slate business and economics correspondent Matthew Yglesias says that the Congressional Budget Office’s (CBO) proposal to account for federal loan programs at fair value is misguided.

The CBO’s proposed budget, under fair value, would account for the cost of a federal loan program based on current market rates, taking greater account of default risks and other factors not currently used in federal lending.

Proponents of the fair value proposal suggest that using market prices will more accurately describe the true cost of some federal loan programs. Under this method, in an example used by Yglesias, the federal student loan program as it currently stands would cost the federal government billions of dollars, rather than the financial gain that’s booked under current accounting procedures.

But the problem, says Yglesias, is that the federal market should operate differently than the private market. “The interest rate on federal debt is a market price. It just happens to be the case that the market interest rate on federal government debt is lower than the market interest rate charged to private financial institutions,” he says.

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