New Accounting Reporting Standards - Do They Help Our Understanding Of Recent Market Disruptions May 6, 2009

Presentation Transcript

New Accounting & Reporting Standards - Do They Help Our Understanding Of Recent Market Disruptions? May 6, 2009 Dina Maher Head of US Accounting Research Credit Policy Group

Agenda Fair Value Derivatives Impairments Securitizations

Agenda Fair Value Derivatives Impairments Securitizations

SFAS 157 Definition "Reasonable esteem is the value that would be gotten to pitch a benefit or paid to move an obligation in a methodical exchange between market members at the estimation date." Exit cost: Not really the cost paid for an advantage (for instance), which is a passage value Market members : Buyers and merchants that are autonomous, educated, capable, and willing Skepticism of a hazard unwilling purchaser Fair esteem ought to reflect how advertise members would esteem the benefit/risk, regardless of the possibility that market members would utilize it uniquely in contrast to the proprietor's proposed utilize

Fair Value Hierarchy – Levels 1, 2, and 3

Citigroup Disclosure of Fair Value Hierarchy Compare to Total Assets = $1.9T Source: Citigroup December 31, 2008 Form 10-K

Valuation Issues: Illiquid Markets SFAS 157 take into account non-ebb and flow showcase information if "troubled" or "constrained" deal Center for Audit Quality (CAQ) and Global Public Policy Committee: Significantly bring down exchange volume does not imply that there are constrained or upset deals. Not suitable to neglect perceptible costs. Guarantors compelled to take whatever market costs are out there and contribution to models and valuations. CAQ paper issued Oct 2007-set the tone from start of credit emergency

Fair Value in Inactive Markets SEC/FASB Clarifications-September 30, 2008 Suggests that if detectable Level 2 inputs require critical alteration, (for example, the CMBX), might be more proper to utilize Level 3 measures. This does not infer that guarantors can simply check to their own particular models. Strengthens need to consolidate current market member desires of future money streams and proper hazard premiums. Permits more utilization of judgment to figure out if a deal is bothered. Disproves CAQ direction issued in 3Q2007 that constrained numerous guarantors to check to profoundly illiquid markets. No material watched changes to valuation after this illumination was discharged Still taking a hard line?

SEC Study on Fair Value Findings of Congressionally commanded SEC review on Mark To Market Accounting issued on December 30, 2008: The impacts of FV bookkeeping norms on a budgetary organization's monetary record FV was utilized to gauge 45% of advantages and 15% of liabilities 25% of FV resources were MTM to P&L and affected announced net wage FV bookkeeping did not assume an important part in bank disappointments The effect of such guidelines on the nature of money related data accessible to speculators Investors bolstered FV, yet many demonstrated requirement for development in application, exposures Staff upheld FASB as free bookkeeping standard setter yet made suggestions to upgrade opportuneness and straightforwardness of process

SEC Study on Fair Value (proceeded with) Findings of Congressionally commanded SEC review on MTM: Alternative bookkeeping models to those gave in SFAS 157 Did not inform the suspension concerning FAS 157, but rather had proposals The fitness and possibility of alterations to such benchmarks Recommended activities to enhance application and comprehension Additional direction for deciding FV in latent markets Assessing whether the joining of credit hazard in FV estimation of liabilities is helpful for speculators Enhancing introduction and revelation Readdress representing monetary resource disabilities (OTTI) Develop a solitary strategy for tending to debilitations to decrease many-sided quality Consider the capacity to "review" upon recuperation Accounting principles ought to keep on meeting needs of financial specialists FASB/IASB effectively taking a shot at this Next on the motivation

April 2 FASB Decisions on FV in Inactive Markets Affirmed target of FV in idle market is the value that would be gotten to offer the benefit in a systematic exchange Eliminated proposed assumption that all exchanges in idle markets are troubled unless demonstrated generally Clarify and distinguish elements for deciding dormant markets and bothered exchanges Requirement to uncover an adjustment in valuation procedure (and related information sources) coming about because of use of the FSP and to evaluate its belongings, if practicable. Exposures will help distinguish effect of new FV direction

FASB Modified Proposal Based on Comment Letters "Those remarks touched base by the hundreds, including severe responses from speculators. 'Advertise esteem is market esteem. Quit giving the monetary business a chance to call a duck a whale ,' expressed an email message marked by Diane Walser." Source: NYT March 31, 2009

More Fair Value Disclosures, More Frequently FASB additionally made obligatory INTERIM FV divulgences for any budgetary instruments that are not at present pondered the accounting report at FV Currently just required in yearly money related explanations Banks should reveal FV of credits each quarter Only required for open elements Effective for between time periods finishing after June 15, 2009 (second quarter filings). May early embrace for 1 st quarter, if likewise received new FV and OTTI recommendations for 1 st quarter.

Credit Analysis and Fair Value May have more Level 3 reasonable esteem measures than beforehand If not, guarantor may have presumed that illiquid showcase not "troubled" - as yet using market quotes or contributions to decide FV How would we be able to tell if FV under new direction speaks to a superior sign of expected money streams? Contrast with Fitch stretch investigation of portfolio For organized fund, check whether FV in scope of Fitch recuperation rating Look at loan fee suppositions on FV measures, contrast with money streams Many budgetary resources, for example, credits and HTM speculations are NOT measured at FV Will now have quarterly divulgences for FV for these monetary instruments

IASB Discussion Paper IASB talk paper on "Diminishing Complexity in Reporting Financial Instruments" FASB likewise discharged for input. Distinguish wellsprings of unpredictability and prescribe middle of the road and long haul arrangements Multiple estimation bases is source (MTM, LOCOM, AFS) Intermediate approach Reduce classes of monetary instruments Replace existing prerequisites with reasonable esteem standard with some ideal exemptions Simplify fence bookkeeping Long term arrangement Fair esteem every single money related instrument

Fitch Response to IASB and FASB Fitch is not persuaded that measuring more instruments at reasonable esteem will decrease many-sided quality. Fitch trusts that the estimation reason for all non-exchanging money related liabilities and for budgetary resources held to development ought to mirror the real money sum the organization hopes to pay to settle an obligation or to get in settlement of a benefit at its normal development. Try not to trust that all support bookkeeping ought to be dispensed with however pushed for better general hazard administration divulgences. Underline need to finish joint ventures on the most proficient method to gauge reasonable esteem and grow revelation necessities before think about further extension of reasonable esteem.

New Fair Value Measures This Year New Acquisition Method for business mixes (SFAS 141(R)), concentrates on reasonable estimation of benefits and liabilities at obtaining date Expiration of one-year deferral of utilization of SFAS 157 on non-money related resources and liabilities Asset retirement commitments at first measured at FV Non-monetary liabilities for exit or transfer exercises at first measured at FV Non-budgetary resources, for example, goodwill, different intangibles and seemingly perpetual resources, measured at reasonable incentive for motivations behind weakness testing

Agenda Fair Value Derivatives Impairments Securitizations

Overview of Fair Value of Liabilities in US GAAP Any money related obligation might be recorded at FV (SFAS 159) at acknowledgment. Every single monetary subsidiary are recorded at FV (SFAS 133) Changes in credit hazard will deliver strange outcomes Increase in credit chance → higher rebate rate → bring down FV of risk Will bring about additions detailed in the salary proclamation. Bring down credit chance → bring down markdown rate → higher FV of obligation Will bring about misfortunes revealed in the wage proclamation.

Fair Value of Derivative Liabilities FV estimation incorporates substance's own credit chance Credit Perspective For subsidiaries in the obligation position, (or for those that are revealed net of all positions), liabilities might be downplayed. Value will be exaggerated to the degree that subsidiaries liabilities are decreased because of expanded credit hazard. FV changes because of credit spread broadening will bring about increases in net pay or in OCI relying upon where subordinate imprints are streaming. Revelations are not required to measure the effect. In the event that credit spreads have enlarged for the backer, ought to assess.

Recovery Analysis Recovery qualities might be affected Out of the cash subordinates will be a risk on twisting up Credit investigation center is around money duty May affect unsecured credit recuperation values In the cash subsidiaries are probably not going to be promptly recoverable - however might be at times Derivatives to the same counterparty are probably going to be gotten

General Criteria Methodology Key Take-Away-Focus on Cash Commitments On supposition organization is going concern Work back to money central remarkable for obligation Interest Use money premium when figuring scope proportions Including net sums paid on loan cost subordinates Need to consider materiality These developments and effects will regularly be little, and can hence be overlooked

New Disclosures FAS 161, Disclosures about Derivatives Instruments and Hedging Activities How and why an element utilizes subsidiary