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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

 
 
Author: Jack Ciesielski Created: 10/13/2006 2:54 PM
The AAO Weblog is a weblog published by Jack Ciesielski , dealing with accounting issues and news topics related to investment and finance.

September 14 was the deadline for comments on the IASB's exposure draft in its "classification and measurements phase" of its three-part project for replacing its financial instruments standard, IAS 39. That document will receive a lot of attention at the Pittsburgh G-20 summit, I suspect.

I certainly hope not. I was not a fan of the proposal, as you can see in my comment letter. In short, there was nothing in it that even remotely appeared to be advantageous to investors. The proposal preserved the economic fiction of amortized cost accounting for financial instruments, with all its attendant needs for an impairment model and stilted hedge accounting.

In perhaps the most best example of accounting double-speak, the proposed accounting was positioned as a "simplification move" because it eliminated several categories of financial instrument classifications, leaving only two possible classifications: amortized cost and fair value. Yet by preserving the amortized cost category, or at least giving it in prominent classification home, they've simplified nothing. They concocted a stilted method of determining which financial instruments

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It's come to this: Kanye West has disrespected the AAO Weblog.

It's true. See for yourself at this link.

My, my. The level of public discourse these days... you'd think everything

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If the remarks of Fed Governor Elizabeth A. Duke are any indication, the answer is a flat "No."

At the outset of her remarks at Monday's AICPA banks and savings institutions conference, she gave the traditional disclaimer that her comments reflected her views and do not necessarily reflect those of the Board of Governors or staff. Let's hope they don't.

By the time you get to just the seventh and eighth sentences of her speech, the hair on your neck should be standing at attention:

"Further, the accounting and regulatory changes made now will help shape future business models for financial institutions and thus influence credit availability. It is important to ensure that these changes facilitate, not hinder, the decision-making processes that support financial intermediation and economic activity."

Maybe regulatory changes made now will help shape future business models - you know, like keeping adequate capital on hand - but the accounting changes will shape future business models? Sounds like an ominous reference to the IASB's exposure draft on financial instrument classification and measurement, with its

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In response to the financial crisis, the IASB has speed-balled a proposal to rejigger the accounting for financial instruments. Issued in July, with the comment period ending today, the proposed accounting would give investors a new prism through they can view financial statements. Only two kinds of accounting would exist for financial instruments: amortized cost or fair value. But they can't look at the same financial instruments both ways - a batch of financial instruments would be classed one way or the other. You wouldn't see financial instruments reported at amortized cost, with a fair value for thesame holding reported at fair value.

It's a cloudy prism for investors. And the criteria for determining what gets amortized cost treatment and what gets fair value treatment is a dog's breakfast of rules and management intentions - something prone to require constant guidanceand interpretation in practice, as companies seek to maximize the amount of assets in the amortized cost category.

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Yesterday, the FASB concluded its deliberations on the amendment of Statement 140 (Transfers of Assets) and FIN 46R (Consolidation of Variable Interest Entities). You can see the briefing document here.

The amendment will go into effect at the beginning of fiscal 2010, and it will cover new and existing securitizations and variable interest entities. Heavy securitizers

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I doubt if there have been any more eagerly anticipated earnings in the last ten years than those of the big banks ever since they started their self-destruct process a couple years ago. First, everyone sweated over the loan loss allowances as housing and asset-backed securities slumped; then when firms had to start reporting the kind of fair value estimates employed - the Level 1, 2 and 3 hierarchy - everyone anticipated which bucket would be fullest. Now, the most hotly-anticipated bank figures is tangible common equity, in whatever form you decide to define it. It's kind of like pro forma earnings has always been, only maybe this is a pro forma lifeline measurement.

The concern of those doing instant analysis on 8-K earnings releases: how has TCE been ginned up by the FASB's new rules on fair value and other-than-temporary impairments? Hard to tell because firms don't have to say much about it in their earnings releases. We've done searches of the recent 8-Ks

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It's been a while, but Merle Hazard is always welcome when he shows up...

His latest CW riff is brief, but a good one: "I can't live in the real world, let's live in make-believe... so don't mark our love to market."

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The finest man I've ever encountered in business passed away Saturday - Lou Lowenstein.

Lou was teaching at Columbia Law School when I met him in 1992. His
writings in Barron's had always struck a chord with me, as well as his book "What's Wrong with Wall Street."

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Finally, the FASB held its long-anticipated meeting on the two FSPs that would have gutted fair value reporting as it exists. There's been more hoopla (and hope-la) about these two amendments than in all of March Madness.

Briefly, here's what transpired, as best as I could tell from the webcast of the meeting:

1. FSP 157-e,the proposal which would have provided a direct route to Level 3 modeling of fair values whenever there was a problem with quoted prices, will be quite different from the original plan. There will be indicators of inactive markets in the final FSP, but they'll only be indicators for a preparer to consider - and more importantly, their presence WILL NOT create a presumption of a distressed price for securities in question. That part of the proposal would have greased the skids for Level 3 modeling. Not now.

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I've sent my comments to FASB on their two proposals that will dilute fair value reporting. It will take a while before they actually make it to the FASB comment letter webpage, so I'm presenting both here as two separate blog posts on the off-chance that any readers might feel compelled to peck out a few comments to the FASB themselves - before the end of the comment period, April 1st. And that's no joke. This one relates to the OTTI idea, as you can tell from the title; the following post is my comment letter on the 157 modifications proposed.

 * * * * * * * * * * * * *

March 31, 2009

 

Mr. Russell Golden

FASB Technical Director

Financial Accounting Standards Board

P.O. Box 5116

Norwalk, CT 06856-5116

 

Re: No. FAS 115-a, FAS 124-a, and EITF 99-20-b, “Recognition and Presentation of Other-Than-Temporary Impairments”

 

Mr. Golden,

 

              I appreciate the opportunity to comment on this proposed Staff Position. As with the Proposed FSP No. FAS 157-e, I believe that this is a flawed proposal resulting from a flawed, though superficially rigorous, process. Though the FASB has met its due process requirements, I do not believe investors will be well-served by a hastily-developed FSP which so clumsily obscures impairment recognition. I repeat my remarks from my comment letter on the FAS 157-e proposal: this FSP will  create difficulties for the FASB’s long-term credibility as an independent standard setter. There is a nearly “Groundhog Day”- like sameness developing in the accounting standard world: at the end of the quarter, politicians acting in the interests of some of their constituents pressure either the IASB or the FASB to “do something” about an unfair standard, and a rapid-response amendment that weakens an existing standard is developed.

 

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