Dodd-Frank News Center

Fed Gov. Duke Calls for Guidance on Accounting for Troubled Debt Restructurings and Sets Goal for Loan Loss Accounting

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

Federal Reserve Board Governor Elizabeth Duke favors the issuance of guidance clarifying the regulatory and accounting treatment of troubled debt restructuring, non-performing assets, and classified loans which, while they have different definitions, time frames, and regulatory consequences, often seem to be used interchangeably. In remarks before the California Bankers Association, the Fed official also sees a need to clarify expectations, improve transparency, and heighten consistency around accounting for loan losses.

With regard to troubled debt restructuring, Gov. Duke noted that some bankers are reluctant to offer modifications that would help struggling borrowers and enhance the potential for ultimate repayment because they are concerned that the loan would be classified as a TDR and remain classified even after performance under the modified terms is demonstrated.

Corporation Finance Division Guides on Financial Statement Disclosure around European Sovereign Debt Exposure

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

Noting current uncertainties in connection with European sovereign debt exposures, and the lack of transparent, comparable information, the SEC Division of Corporation Finance issued guidance out of concern about the adequacy of financial statement disclosures for investors. Under the circumstances, the staff believes that principles-based item requirements may call for more detailed disclosure on this topic. In determining which countries are covered by the guidance, companies should focus on those experiencing significant economic, fiscal and/or political strains such that the likelihood of default would be higher than would be anticipated when such factors do not exist.

PCAOB Finds Big Four Audit Firm Deficient in Testing Issuer’s Fair Value Measurement Procedures and Internal Controls

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

A PCAOB inspection team identified matters that it considered to be deficiencies in the performance of the audit work of a Big Four firm, primarily including failures involving fair valuation of asserts and internal control over financial reporting. In some instances, follow-up between the audit firm and the issuer led to a change in the issuer’s accounting or disclosure practices. In some cases, the conclusion that the firm failed to perform a procedure was based on the absence of documentation and the absence of persuasive other evidence, even if the firm claimed to have performed the procedure.

Hedge Fund Industry Seeks Fair Market Valuation for Securities in Dodd-Frank Liquidation Authority

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

The hedge fund industry has urged regulators implementing the orderly liquidation provisions of the Dodd-Frank Act to provide for the fair market valuation of securities of failing financial firms rather than the fixed valuations proposed for government securities and contemplated for other securities. In a letter to the Managed Funds Association said that assigning fixed valuations for certain types of assets in advance, as the Proposed Rule contemplates for Treasury and other U.S. government securities, is likely to lead to valuations inconsistent with the statutory standard of fair market value. It could also lead to distortions in market activity.

In the MFA's view, the appropriate valuation of assets is a critical component of any liquidation process. Section 210(a)(3)(D)(ii)(I) of the Dodd-Frank Act treats any portion of a secured claim which exceeds the fair market value of the underlying collateral as an unsecured claim, paid in the same manner as other general unsecured creditors. But Dodd-Frank does not define the term “fair market value” for the purpose of determining the amount of secured claim that will be treated as an unsecured claim. The proposed rules contemplate adopting a regulation establishing a fixed valuation for U.S. government securities, and asks whether valuations should be fixed for other forms of collateral.

FSA Chair Says Bank Fair Value and Loan Loss Accounting Can Add to Systemic Risk; Notes Tension Between Banking and Securities Regulators

This story appeared in Jim Hamilton's World of Securities Regulation.

Fair value mark-to-market accounting and accounting for loan losses as applied to banks can increase pro-cyclicality and pose a systemic risk, said UK Financial Services Authority Chair Adair Turner, and thus is linked to macro-prudential risk regulation. In remarks at a London conference hosted by the Institute of Chartered Accountants of England and Wales, he noted that no other sector of the economy is remotely comparable to banking in its capacity to be a driver of economic volatility. As a result, accounting standards relevant to banks need to reflect these differences.

On a broader level, the FSA Chair acknowledged the rising tension over fair value accounting between banking and securities regulators, which has spilled over into the accounting standard setters. The banking regulators are convinced that banks are different and that the IASB and FASB must consider this difference. The pure securities regulators, conversely, tend to be more sympathetic to the idea that accounts are for investors and must reflect fair value at all times.

IASB Chair Charts Path to New Fair Value Standard; Rejects Interim Adoption of US Standard

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The IASB is on target to replace the fair value accounting standard embodied in IAS 39 with a new standard that will attain broad global acceptance. In remarks before the European Parliament’s Economic and Monetary Affairs Committee, IASB Chair David Tweedie said that the new fair value rules would be adopted after an extensive consultation that will take into account the views of all stakeholders, including the Committee, ECOFIN, central banks and regulators. The comment period on the proposed reform of IAS 39 has ended, said the Chair, and the IASB received letters from more than 200 individuals and organizations. Additional board meetings have already been held, and will continue to be scheduled as required to complete the project in time for the 2009 financial year.

IASB Assures Obama and G-20 on Fair Value Accounting Reforms

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Ahead of the G-20 Pittsburgh summit, the oversight body of the IASB has assured the G-20 that the reform of the international standard for fair value accounting in proceeding along the lines of principles outlined by the Basel Committee. Complimentary reform of loan loss provisioning is also on target. In a letter to President Barack Obama, host of the G-20, Gerrit Zalm, chair of the IASB oversight committee, stressed the urgency in completing the first component of the comprehensive revision of IAS 39, the IASB’s financial instrument standard, by year end. In this work, the IASB is guided by principles of transparency and the avoidance of undue complexity enunciated by Basel and recently endorsed by the G-20 Finance Ministers, including Treasury Secretary Tim Geithner. In addition, Basel urges that the standards reflect the need for earlier recognition of loan losses.

Banking Industry Says Proposed Changes to Fair Value Accounting Would Contravene G-20 Goals by Disrupting Convergence and Increasing Procyclicality

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Ahead of the G-20 meeting, a letter to the Treasury and the Fed from the banking industry emphasized that the fair value accounting changes proposed by the IASB and FASB would increase procyclicality, disrupt the global convergence of accounting standards, and undermine the banking business model. As such, the proposals fly in the face of the G-20’s endorsed reform of accounting standards. The American Bankers Association urged Treasury and the Fed to tell the G-20 conference that the fair value accounting proposals are contrary to the G-20’s own recommendations.

G-20 Finance Ministers Endorse Single Set of Global Accounting Standards Based on Basel Principles

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

In preparation for the upcoming G-20 summit in Pittsburgh, the G-20 Finance Ministers have issued a communiqué calling for a convergence towards a single set of high-quality, global, independent accounting standards on financial instruments, loan-loss provisioning, off-balance sheet exposures and the impairment and valuation of financial assets. Within the framework of the independent accounting standard setting process, the G-20 encouraged the IASB to take account of the Basel Committee’s guiding principles on IAS 39 and the report of the Financial Crisis Advisory Group. Earlier this year, the IASB set forth a draft for a new fair value standard to replace IAS 39. The comment period on the proposal ends on September 28, 2009. A final standard is expected in the first half of 2010.

Geithner Addresses International Capital Standard at G-20 Meeting

This story appeared in Bank Digest.

Regarding a stronger international capital standard for banks, “Our objective is to reach agreement by the end of next year on a new standard that will raise capital and liquidity requirements and dampen rather than amplify future credit and asset price bubbles,” Treasury Secretary Timothy Geithner remarked at the Sept. 5, 2009, G-20 Meeting of Finance Ministers and Central Bank Governors in London. He said that actions of the G-20 have “pulled the global economy back from the edge of the abyss.” However, according to Geithner, significant challenges lay ahead. He said that unemployment is “unacceptably high” and urged the creation of a foundation for future growth, along with financial reform, including a stronger international capital standard for banks and a change in compensation practices.