RiskMetrics to Host Webcast, Fair Value Measurements in Financial Reporting: Perspectives from a FASB Board Member, on April 23
Submitted by: Sarah Cohn, Corporate Communications
The financial crisis has generated extensive debate among financial market participants about the use of fair value measurements in financial reporting. The Financial Accounting Standards Board (FASB) recently issued new fast-tracked guidance that relaxes some of the requirements for fair value measurements, while also increasing disclosure requirements.
RiskMetrics will host a webcast on Thursday, April 23 at 11:30 a.m. EDT, where FASB Board Member Marc Siegel will offer insight on the fair value debate, including:
* the role FASB is playing in responding to the financial and economic crisis;
* the use of fair value in current GAAP, and the related controversy;
* the process FASB follows in issuing guidance;
* other issues FASB is currently working on.
Jeremy Perler and Dan Mahoney, Heads of Accounting Research for RiskMetrics Group, will moderate the webcast and provide an overview of RiskMetrics' research on the topic of fair value. To sign-up for webcast, please visit here.
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Thursday, March 26, 2009 |
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FASB’s Proposals on Fair Value Accounting
Submitted by: Jeremy Perler, Co-Head of FR&A Accounting Research
On March 18, the Financial Accounting Standards Board released a proposal to issue new guidance on: (1) measuring fair value of financial instruments in inactive markets, and (2) recording other-than-temporary impairment (OTTI) charges. Notwithstanding the controversial nature of these proposals (particularly OTTI), FASB is fast-tracking these changes at the behest of a Congressional directive to revise these rules as soon as possible. The comment period for these proposals is only two weeks to allow new rules to be in place for the first quarter of 2009. FASB has scheduled an April 2 meeting on the proposals.
In its first proposal, FASB reasserts (yet again) that fair value accounting does not require marking to distressed values or “fire sale” prices. FASB hopes to reduce the stigma associated with Level III assets, and in doing so cause assets listed with bad Level II valuations to be shifted to Level III. The guidance provides a checklist to help companies assess whether a market is inactive. While the checklist should be helpful in establishing the definition of an inactive market, it appears to provide many “outs” that make it much easier for a company to deem a market inactive.
The second proposal (issued after a 3-2 FASB vote) is far more concerning as FASB seems to be making it easier for companies to avoid taking OTTI charges on distressed securities (both debt and equity). In determining whether a security is impaired, FASB is essentially allowing companies to provide negative assurance that it will hold the security until recovery (“we do not intend to sell the security before it recovers”)-- a much easier and defensible statement to make than the positive assurance that is now required (“we intend to hold the security until recovery”). As a result, if a company simply states that (a) it does not intend to sell a security and (b) it will likely not be required to sell the security, it need not take a charge (except to the extent there is a decline in value resulting from credit risk, as estimated by the company).
This proposal to loosen OTTI requirements is problematic as it will cause balance sheets to be even less representative of economic reality (for both financial and non-financial companies). Reducing transparency in this ultra-sensitive area will only breed more balance sheet distrust. This change also may penalize transparent companies who have been honest with their impairment assessments, while rewarding opaque companies who aggressively avoided charges.
We believe the investment community is best served by greater transparency into a company’s economic reality as it allows for the most educated and rational decision-making. This Congressional directive seems to be a result of the financial institution agenda to “fix” accounting rules in a way that would cosmetically bolster their financial position, particularly for regulatory purposes. Expect this agenda to continue as it is much easier for financial institutions to pressure legislators to insist on GAAP accounting changes than it is for them to erase their recent history of bad loans and transactions that put them in this position in the first place. Additionally, in the face of dwindling regulatory capital, this agenda helps them maintain their regulatory ratios without having to ask for changes to regulatory requirements. We are concerned that the influence of financial institutions will spread to other accounting principles as well, and we sincerely hope that the current plan to consolidate off-balance sheet entities at the end of 2009 is not derailed.
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Tuesday, March 10, 2009 |
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RiskMetrics to Hold Webcast on Oil and Gas Accounting Hot Topics on March 12
Submitted by: Sarah Cohn, Communications
RiskMetrics' Financial Research and Analysis Team raised concerns for 2009 regarding the likelihood of negative reserve revisions and impairment charges as oil and gas companies deal with the reality of lower oil and natural gas prices. As expected, negative reserve revisions were the norm and many companies took hundreds of millions of dollars, if not billions, in impairment charges. While the threat of reported price-related reserve revisions has subsided until early next year, the threat of impairment, ceiling test charges, covenant violations and reduction in borrowing bases remains imminent.
Going forward, energy companies will be preparing for the modernization of the U.S. Securities and Exchange Commission's (SEC) reserve disclosure rules that will go into effect for filings after December 31, 2009. These new rules have the potential to increase year-end 2009 reported reserve levels due in particular to the allowed disclosure of probable and possible reserves and the expansion in technologies allowed in booking reserves.
Julie Hilt Hannink, Riskmetrics' Oil and Gas Research Analyst, will discuss in this webcast on March 12 at 11 a.m. EDT companies at risk for further impairments, reserve revisions, covenant revisions and borrowing base reductions. She will also cover the potential winners and losers under the new rules and also how RiskMetrics is going to update its screening and analytical tools for the new disclosures. Dan Mahoney, Senior Industrials Research Analyst, will moderate the webcast.
To register for this webcast, please visit here.
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Wednesday, February 11, 2009 |
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RiskMetrics Group Publishes Pension Report Assessing Impact of New Legislation and Discount Rate Decline on Plan Health
Submitted by: Dan Mahoney, Senior Analyst for Financial Research and Analysis
Pension plans were under a tremendous amount of stress in 2008, which may create additional risks to the already stressed income statements, balance sheets, and cash flows of corporations.
This report reflects certain key changes related to pension plans that will impact reported results in fiscal 2009: (1) a sharp decline in equity markets in 2008; (2) a sharp decline in bond yields experienced in December 2008, which eliminates the beneficial impact on benefit obligations of higher discount rates that was seen through much of 2008; and (3) the passage of the Worker, Retiree, and Employer Recovery Act (“WRERA”) in December 2008, which impacts pension funding requirements.
Reflecting these three key events, we estimate the funded status of plans, the corresponding cash funding requirements, and the overall impact of pension plans on companies’ financial health. We conclude that the deterioration in plan assets from declining equity markets and higher bond yields results in significantly lower plan funding on financial statements and appears to offset any relief plans may have received from passage of the WRERA.
To access the key takeaways from this report, please visit here.
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Monday, February 9, 2009 |
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RiskMetrics Group to Hold Accounting Trends and Hot Topics for 2009 Webcast on February 11
Submitted by: Sarah Cohn, Communications
In a time of economic turmoil and crisis of confidence, it should not be surprising that accounting rules are again in the spotlight with accounting standard setters and regulators having been very active as of late. In fact, at last month’s annual AICPA Conference on SEC & PCAOB Developments, many speakers came with a similar message for the large gathering of accountants and auditors: during times of stress, management is more prone to resort to aggressive accounting tactics and fraud. While we all know that analyzing companies in this difficult environment requires fine-tuned antennae and an extra dose of healthy skepticism, it is important to remember to be especially cautious around metrics that companies accentuate as measures of their financial health – particularly non-GAAP or newly-introduced metrics that are emphasized to investors but are not subject to rigorous audit procedures. In addition, new proposals are rapidly being rolled out and fast-tracked, and several accounting paradigm shifts are under serious consideration. We expect this rapid pace to continue throughout 2009.
To keep market participants better informed on all the accounting and financial reporting changes in 2009, RiskMetrics will hold a webcast on Wednesday, February 11 at 11 a.m. EST. Dan Mahoney and Jeremy Perler, RiskMetrics Group's co-heads of Accounting Research, will discuss critical accounting and financial reporting hot topics that investors should watch in 2009, including mark-to-market accounting, changes to accounting for off-balance sheet entities, new rules surrounding business combinations, implications of pension accounting, the status of US GAAP convergence with IFRS, proposed changes to revenue recognition standards, and other emerging issues.
To register for the webcast, please visit here. Registrants will also receive a copy of the key takeaways from the report on accounting and financial reporting trends in 2009.
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Thursday, November 6, 2008 |
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Investors Defend Accounting Rule
Submitted by: Ted Allen, Publications
During a roundtable hosted by the Securities and Exchange Commission, investor and auditor representatives defended mark-to-market (also known as “fair value”) accounting and urged the SEC to resist political pressure to suspend or repeal it.
“Fair value reporting is far from perfect, but it is a fundamental mechanism to provide investors with transparency,” said Scott Evans of the TIAA-CREF education pension system. “This crisis has many causes, but fair value accounting is not one of them.”
The SEC held the Oct. 29 roundtable as part of a study on mark-to-market accounting for financial institutions that was mandated by Congress under the financial industry bailout legislation, the Emergency Economic Stabilization Act of 2008. This accounting rule, which is part of Financial Accounting Standard (FAS) 157, requires firms to value mortgage-backed securities and other financial instruments based on current market prices, but the global credit crisis has caused asset values to collapse and made it more difficult for banks to meet their capital requirements.
Another roundtable is set for Nov. 21. The SEC, which is accepting public comments on the issue until Nov. 13, plans to complete its study by Jan. 2. The Oct. 29 roundtable had 15 panelists, including investor representatives, financial institution officials, auditors, analysts, and academics. In addition, various regulatory and government officials, including SEC Chairman Christopher Cox and thee other commissioners, attended.
Most of the investor advocates, auditors, and academics asserted that fair value accounting best represents the current economic reality and therefore offers improved transparency. “Fair value reporting, despite its imperfections, remains the best system,” said Vincent Colman of PricewaterhouseCoopers.
The proponents rejected the claims by bank officials and some lawmakers that FAS 157 is to blame for the current financial market crisis. They encouraged the SEC to study and understand the structural root causes of the crisis. Fair value supporters argued that changing the rules and moving away from FAS 157 will only diminish confidence in the market and will aggravate financial industry problems. A parallel was made several times to the economic stagnation in Japan that resulted when banks did not have to fully account for distressed loans on their balance sheets. As Ray Ball, an accounting professor at the University of Chicago recalled, that practice undermined investors’ faith in Japanese banks and “stifled the recovery of the economy.”
While acknowledging there are imperfections in fair value accounting, proponents said they are open to working to improve the rules. Colman suggested that the rules could be revised to distinguish between actual credit losses and other factors, such as value declines that stem from illiquid markets.
Mark-to-market accounting “is the best alternative we have in terms of comparability and transparency,” noted Richard Ramsden, a banking industry analyst with Goldman Sachs. “Mark-to-market is critical to restoring investor confidence in the financial sector.”
Opponents of fair value accounting argued that marking asset values to current market prices (especially in a distressed market) is unrepresentative and therefore reduces transparency. William Isaac, a former chairman of the Federal Deposit Insurance Corp. (FDIC), recalled that credit problems in the U.S. banking industry (which included exposure to distressed foreign debt) were much more serious in the early 1980s than they are today; and if mark-to-market accounting had been in place then, there would been devastating consequences.
Isaac said FAS 157 has been “destructive of bank capital” and noted the significant losses suffered by investors at Washington Mutual, Wachovia, and other banks. “No one is talking about the hundreds of billions of dollars that pension funds have lost because of these rules,” he said.
Two bank representatives--Aubrey Patterson, chief executive of BancorpSouth of Mississippi, and Chuck Maimbourg of Ohio-based KeyCorp--said fair value accounting is discouraging banks from undertaking mergers. Patterson said the rule requires banks to mark down assets that the bank has no intention of selling, which further hurts the bank’s balance sheet.
Isaac and other opponents of fair value accounting consistently brought up the inappropriateness of marking assets to “fire sale” prices or to a “computer model.” However, proponents countered that current fair value rules do not require marking to distressed values or fire sale prices. Rather, they noted that the Financial Accounting Standards Board (FASB)--which sets U.S. accounting standards--and the SEC have clearly stated that judgment should be applied, particularly at a time when the market is distressed. They noted that FAS 157 brings more judgment into the process than any other accounting standard. On Sept. 30, regulators issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active,” that provides added guidance for times of market stress. The Financial Accounting Foundation, which oversees FASB, is resisting calls to overturn FAS 157.
Several investor and auditor representatives emphasized the need for FASB to remain independent and free from political interference--otherwise financial statements will cease to be reliable. The banking representatives did not appear to share this concern; one representative stated that the Federal Reserve and the FDIC should approve accounting standards.
Lisa Lindsley of the CtW Investment Group, the investment arm of the Change to Win labor federation, noted that insufficient risk oversight by boards played a greater role in the financial crisis than fair value accounting. “What’s really needed is governance reforms,” she said, calling for proxy access, separation of CEO and board chair positions, and annual shareholder votes on executive compensation.
Jeremy Perler, co-head of accounting research at RiskMetrics Group, contributed to this article.
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Thursday, October 2, 2008 |
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Loosening of “Mark-to-Market” Accounting Rules Debated
Submitted by: Subodh Mishra, Governance Institute
Sections 132 and 133 of the Senate bailout bill approved last night would authorize the Securities and Exchange Commission to suspend and to study alternatives to “mark-to-market” or “fair value” accounting. The method of accounting--known formally as SFAS 157--effectively values an asset at its current, rather than purchase, price.
Critics of the practice blame valuations made under the decades-old rule for fueling the credit crisis by forcing financial institutions to value their assets at “fire-sale” prices. The SEC and the Financial Accounting Standards Board took steps on Sept. 30 to “clarify” the rules to give companies a greater say in how they value certain assets. The move was welcomed by banking interests that have also pushed for a loosening of mark-to-market accounting rules in the bailout legislation.
“More and more of our members in recent weeks have raised concerns that a number of accounting firms were mistakenly interpreting SFAS 157 in a way that required marking assets to fire sale values,” American Bankers Association head Edward L. Yingling noted in a Sept. 30 statement. “This guidance will help auditors more accurately price assets that are difficult to value under current market conditions … [and better their] understanding of the accounting literature as they prepare third quarter reports,”
Advocates for investors and auditors oppose the change, arguing that any watering down of SFAS 157 would result in illusory accounts. The Center for Audit Quality, the Council of Institutional Investors, and the CFA Institute--which represents the nation’s public company auditors, institutional investors and chartered financial analysts--said they oppose any suspension of SFAS 157.
“Suspending fair value accounting during these challenging economic times would deprive investors of critical financial information when it is needed most,” the groups said in a joint statement on Oct. 1. “Investors have a right to know the current value of an investment, even if the investment is falling short of past or future expectations.”
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Monday, September 22, 2008 |
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RiskMetrics Group to Hold Webcast, Financial Markets: The Financial Storm Continues for Institutional Investors, on September 23
Submitted by: Sarah Cohn, Communications
The turbulent market of a mere few months ago has reached a new highpoint. And as the heat continues to rise, some feel that a meltdown of the financial market may be closer than anticipated. The effects can be felt throughout the institutional investor community, as many look to sell their securities in favor of less risky investments. RiskMetrics Group will hold a webcast, Financial Markets: The Financial Storm Continues for Institutional Investors, on Tuesday, September 23 at 1:30 p.m. EDT.
With the federal government bailouts of some of the world’s leading financial institutions and the mounting fear and anxiety felt by investors globally, it is essential for institutional investors to have the latest information and insight in order to make sound portfolio decisions. During this webcast, RiskMetrics Group’s Financial Research & Analysis Financial Sector senior analysts, Zach Gast, Nathan Powell and Kevin Mixon, will share their forensic accounting perspective as it relates to:
-The impacts on the broader financial sector, including the federal government’s response, counterparty risk and fair value accounting;
-The status of the banking sector; and
-Trends and developments in the U.S. and Europe.
To register for this webcast, please visit here.
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Tuesday, September 16, 2008 |
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RiskMetrics Group to Hold Webcast on Accounting Convergence: What Investors Need to Know about IFRS
Submitted by: Sarah Cohn, Communications
The U.S. Securities and Exchange Commission has released a proposed road map for U.S. publicly traded companies to transition to international financial reporting standards (IFRS). The SEC estimates that perhaps more than 100 companies will qualify for IFRS reporting as early as 2009, with the proposed shift being complete by 2015. This transition away from U.S. GAAP will create challenges for investors seeking to analyze and compare the financial statements of U.S. companies.
Marc Siegel, RiskMetrics Group’s Head of Accounting Research and Analysis, will lead a webcast on Wednesday, Sept. 17 at 10 a.m. that will outline what investors can expect from such changes. During the webcast, Mr. Siegel will also discuss:
-The potential impact this change in accounting standards has on the institutional investor.
-The SEC’s rationale and proposed timeline for moving companies to IFRS.
-Examples of how the IFRS and U.S. GAAP approach critical accounting issues differently in different industry sectors.
To register for the webcast, please visit here.
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Tuesday, September 9, 2008 |
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Commission Lays Out IFRS Roadmap
Submitted by: Subodh Mishra, Governance Institute
SEC commissioners voted Aug. 27 to publish for comment a proposed “roadmap” that could require U.S. corporate issuers to begin filing accounting statements using International Financial Reporting Standards, or IFRS, as early as 2014. Officials say the commission would make a decision by 2011 on whether IFRS is in the “public interest,” while a finite number of select companies will be allowed to file in IFRS as early as 2009.
“An international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions,” SEC Chairman Christopher Cox said in a press release noting the plan. “The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors' increasing ownership of securities issued by foreign companies that report financial information using IFRS, have led the [SEC] to propose this cautious and careful plan.” U.S. issuers now use the Generally Accepted Accounting Principles, or “U.S. GAAP.”
The Council of Institutional Investors (CII), which represents U.S. public, union, and corporate pension funds, expressed concern about whether the IFRS will be as rigorous and useful as GAAP. The council also questioned the independence of the International Accounting Standards Board (the London-based group that oversees IFRS) and said the board needs more investor representation. “We urge the SEC to make the switch when, and only when, international standards meet or exceed the high level of investor protection that current U.S. standards afford,” Jeff Mahoney, CII's general counsel, said in an Aug. 28 statement.
The SEC’s move is a signal of the growing dominance of IFRS. More than 100 nations—including all European Union member countries—currently require or permit IFRS reporting, according to the SEC. Approximately 85 of those countries require IFRS reporting for all domestic, listed companies. Moreover, a host of countries including Canada, India, Brazil, and South Korea are slated to use IFRS in the coming years.
While some U.S. companies with a significant global presence may begin using IFRS in 2009, few companies overall appear ready to adopt IFRS. A 2008 survey by accounting firm Deloitte & Touche found that 36 percent of respondents had not yet considered a plan for adoption of IFRS. Moreover, nearly 42 percent of respondents indicated they would not consider adopting IFRS, while 30 percent would, and a further 18 percent were undecided. The full roadmap will be published in the Federal Register; public comments will be due back to the commission within 60 days of publication.
RiskMetrics Group will hold a webcast on Wednesday, Sept.17 at 10 a.m. EDT titled, Accounting Convergence: What Investors Need to Know about IFRS. Marc Siegel, RiskMetrics Group's Head of Accounting Research and Analysis, will outline what investors can expect from such changes. To register for the webcast, please visit here.
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Thursday, August 28, 2008 |
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International Financial Reporting Standards (IFRS) Could be Used by US Companies As Soon as Next Year
Submitted by: Marc Siegel, Headof Accounting Research
The US Securities and Exchange Commission voted unanimously yesterday (5-0) to propose a “roadmap” to what has been termed accounting convergence. The proposal provides a timetable toward the lofty goal of a single set of global accounting standards. Specifically, a small number of US-based companies (estimated to be slightly more than 100) could be eligible in 2009 to switch from reporting under US GAAP to reporting under IFRS. To be eligible, the company would need to be one of the 20 largest companies in its global peer group, with many peers already using IFRS.
Longer term, the proposal envisions moving large US registrants to IFRS in 2014, mid-size companies adopting in 2015 and the bulk of the remainder adopting in 2016. However, there are some caveats to these long-term milestones including a stabilized funding mechanism for the International Accounting Standards Board. There will be a checkpoint in 2011, at which point in time a new SEC Chairman would make a “go or no-go” decision on the longer term IFRS adoption schedule. Some have wondered whether the US Congress will ultimately weigh in on this issue. A wholesale adoption of IFRS would mean that US-based companies, for the first time, are utilizing accounting standards not promulgated by a US-based standard-setter. In other words, politics could play a role in the ultimate outcome of these efforts.
Having said that, this roadmap is a necessary step to spur to action all the training, education and other work to be done so that investors, analysts and all users of financial reports are ready if and when US-based companies begin to report using IFRS.
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Wednesday, August 13, 2008 |
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Regulatory Actions around Auction Rate Securities
Submitted by: Marc Siegel, Head of Accounting Research and Analysis
As we’ve seen over the past week, several of the large banks have begun to announce plans to make whole the retail and institutional investors in auction rate securities. Some of these announcements have resulted from regulatory action while some companies are attempting to preempt regulatory action by entering into voluntary programs. Details around the regulatory actions precipitating the announcement by banks are highlighted in a recent article by Mondaq Business News. Specifically, the story discusses the Securities and Exchange Commission’s announcement last week to settle with Citigroup Global Markets, UBS Securities and UBS Financial Services to repurchase auction rate securities of retail investors in the near term and use best efforts to repurchase at par the securities of institutional investors by the end of 2009 or 2010. Additional news about auction rate securities and other big banks can be seen here. The New York Attorney General has indicated he may still pursue other avenues of investigation with respect to auction rate securities.
Given the federal and state regulator’s views on auction rate securities, we’re likely to hear more actions in the months ahead. Please let us know your thoughts on the auction rate securities situation.
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Monday, July 28, 2008 |
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RiskMetrics Group to Hold Webcast on July 30: Proposed Accounting Changes on the Horizon--What Investors Can Expect
Submitted by: Sarah Cohn, Communications
RiskMetrics Group is scheduled to hold a webcast on July 30 at 10 a.m. called, Proposed Accounting Changes on the Horizon--What Investors can Expect. As the fallout of the credit crisis continues to spill into the marketplace, pressure on companies to better disclose their risk of losses is mounting from investors and regulatory committees alike. Despite strong opposition from some financial institutions and other publicly-traded companies, the Financial Accounting Standards Board (FASB) has proposed changes in accounting rules that will have varying outcomes on companies' reporting standards. Marc Siegel, RiskMetrics Group's Head of Accounting Research and Analysis, will outline what investors can expect from such changes. Mr. Siegel will also discuss the implications as it relates to the future of off-balance sheet treatment for securitization structures and asset transfers; a controversial new Exposure Draft issued by the FASB that could change the playing field regarding the disclosures companies are required to make for all manner of loss contingencies; and what modifications may come of fair value accounting.
To sign-up for this webcast, please visit here.
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Tuesday, July 15, 2008 |
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RiskMetrics Group's Biggest Concerns Performance Update
Submitted by: Stephanie O'Neil, Marketing
With disappointing news continuing to dominate the headlines, it should not be surprising that overall company performance in the first six months of the year has been less than stellar. RiskMetrics Group’s forensic financial accounting analysts, who uncover inherent risk in companies, track a list of companies that they see as being especially concerning. As U.S. markets retreated into bear market territory in the first half of 2008, the companies included in our "Biggest Concerns List" were hit much harder than their fair share.
For an excerpt of our Biggest Concerns list performance update, please access the report here.
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Monday, March 3, 2008 |
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RiskMetrics Group March 5 Forum: Auction Rate Security--Understanding Risk Exposure
Submitted by: Sarah Cohn, Marketing and Communications
RiskMetrics Group will hold a webcast on Wednesday, March 5 at 11 a.m. on how to better understand the risk exposure around auction rate securities. The forum will cover the surprisingly high company exposure to auction rate securities and other risky “close-to-cash” investments. Investors can gain a better understanding of a company’s risk exposure, despite limited transparency or lack of investment disclosure available. Additionally, the forum will present today’s transparency issues, tips for assessing risk despite the current barriers, and examine various company methods and examples of disclosures.
To register for the forum, please visit here.
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Wednesday, February 27, 2008 |
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Big Changes Afoot at U.S. Financial Accounting Standards Board
Submitted by: Marc Siegel, Head of Research
Yesterday, the group that oversees the U.S. Financial Accounting Standards Board (FASB) voted to enact some sweeping changes to how standard setting will be accomplished in the future. As one example, effective in just four months, the FASB Board will go from seven members to five. Another troubling development is that the FASB Chair will have ultimate decision-making authority as to the agenda the Board will consider. This puts too much power in the hands of a single individual and could make it more difficult to recruit and retain other Board members.
On balance, rather than addressing these types of day-to-day operational issues, the Financial Accounting Foundation (FAF) should have worked toward addressing and potentially leading the way in the development of a national plan toward achieving the goal of a single, global set of accounting standards. That need is far more critical since the recent push toward international accounting convergence is resulting in reduced transparency and comparability for financial statement users.
RiskMetrics Group just published a report, Big Changes Afoot at U.S. Financial Accounting Standards Board but are they the right ones, to the Accounting Trends section of its Knowledge Center. To access the report, please visit here.
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Monday, February 11, 2008 |
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Credit Card Master Trusts: Delinquecies on the Rise
Submitted by: Kevin Mixon, FR&A Analyst
As the fallout from the tightening in residential mortgage lending and sub-prime segment continues to unfold, RiskMetrics Group’s Financial Research and Analysis team continues to closely monitor the performance of credit card master trusts. The performance of these trusts, which hold credit card loans that are sold off to investors, can be an important bellwether in assessing consumer credit quality. Since November 2007, we highlighted a notable deterioration in credit quality across our survey group of credit card master trusts, which continued in December.
With Americans’ total revolving debt on the rise – most of it on credit cards – it is prudent to take note of the rate of delinquencies and default of credit cards loans. The Wall Street Journal recently relayed our analysis of more than $200 billion of credit-card loans that are sold off to investors by major card issuers such as Citigroup, Capital One Financial, American Express and J.P. Morgan. This analysis showed that in December, an average of 7.6% of credit-card loans were either at least 60 days delinquent or had gone into default, up from 6.4% a year earlier. A further sign of weakness in consumer credit quality can be gleaned from this study of 14 large pools of credit-card assets, where we found that delinquencies and bad loans had jumped by as much as 19% in the last six months of 2007.
We will continue to monitor consumer credit quality though our analysis of credit card mast trusts, which in addition to its potential impact on consumer spending, can affect the broader macro economy.
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Monday, January 14, 2008 |
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Accounting Trends Webcast--What You Need to Know for 2008
Submitted by: Sarah Cohn, Marketing and Communications
Do you need the whole story about which accounting trends will impact you this year? Marc Siegel, RiskMetrics Group’s Global Head of Financial Research and Analysis, will give insight into the key accounting and financial reporting trends in 2008 in a webcast on Friday, January 18 at 11 a.m. EST.
This webcast will look back at aggressive reporting techniques and unconventional methods management has used to mask operational deterioration in their businesses and how you can learn to challenge a company's assertions on reported metrics going forward. Examples will be given where reverse-engineering company data through forensic financial accounting, or deep-dive analysis, has yielded results that have either corroborated or disproved the reported results.
In addition to uncovering companies' hidden risk in the marketplace, Marc Siegel will discuss accounting issues that should be at the forefront of investors’ minds, as well as what regulators are focusing on in 2008.
To register for the accounting trends webcast, please visit here.
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Wednesday, December 12, 2007 |
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Investors Voice Concern Over International Accounting Standards
Submitted by: L. Reed Walton, Publications
International regulators should make sure that companies, auditors, and the European Union do not have undue influence on international financial reporting standards before the U.S. considers adopting them, the Council of Institutional Investors (CII) wrote in a Nov. 9 letter to the U.S. Securities and Exchange Commission.
"[A]t least three related … issues should be resolved as soon as possible and certainly before the [SEC] considers allowing U.S. issuers to prepare financial statements in accordance with [International Financial Reporting Standards]," CII General Counsel Jeff Mahoney wrote in the letter. These issues include the funding sources for the International Accounting Standards Board (IASB), the European Union's influence over the approval of standards, and the lack of sufficient investor representation on the IASB's 14-member board.
The SEC is considering allowing U.S. companies to use International Financial Reporting Standards (IFRS), the accounting rules set by the IASB, in addition to, or instead of, the Generally Accepted Accounting Principles (GAAP) that are used in the United States. On Nov. 15, the SEC voted to drop rules requiring foreign firms listed in the U.S. to reconcile their financial reports with GAAP.
Meanwhile, the European Union, Japan, and other nations have been urging the agency to allow U.S. companies to use the international reporting standards. The SEC received almost 100 letters on the topic between Aug. 9 and the Nov. 13 comment deadline. The commission has announced plans to hold roundtables on the issue on Dec. 13 and Dec. 17.
Most of the funding for the London-based IASB comes from voluntary contributions by fewer than 200 international companies and auditing firms. By contrast, the IASB's U.S. counterpart, the Financial Accounting Standards Board (FASB), is funded by mandatory accounting-support fees from U.S. issuers.
In the CII letter, Mahoney cited a concern raised by the FASB in its comment letter to the SEC: "We believe the current funding levels and staffing mechanisms of the IASB are not adequate for the tasks it will face if the … IFRS becomes the single set of global accounting standards."
In response to these concerns, the IASB has announced a "broad-based funding regime" that would give the organization an additional £12 to £16 million per year, beginning in 2008. Money would come from national funding schemes based on gross domestic product in countries such as Australia, the United Kingdom, and the Netherlands, while voluntary giving programs would continue in countries like China, France, India, and South Africa, the IASB said in a Nov. 6 press release.
Notwithstanding the IASB's new funding approach, the California Public Employees' Retirement System, the largest U.S. state pension fund, wrote in its own comment letter to the SEC on Nov. 14 that it is "not confident at this point that these steps will ensure an independent, well-governed IASB that is free of potential influence."
That concern was also raised during a Nov. 12 roundtable discussion on accounting convergence at New York University. Participants agreed that the IASB should have a more reliable source of funding as well as board stability.
The CFA Institute Centre for Financial Market Integrity, a worldwide organization of investment professionals, also told the SEC--in a comment letter on a related rule release--that the financial independence of the IASB is an important concern.
The CFA Institute also noted that there are "major gaps" in the IFRS that must be addressed before the U.S. could consider adopting those standards. The gaps, the group stated, include accounting for insurance contracts and extraction activities involving minerals, oil, and gas, as well as deficiencies in standards for pension plans and leasing.
The European Union's close involvement in setting international accounting standards is also cause for concern, the CII letter stated.
In July 2003, the European Commission, the administrative branch of the EU, voted to begin endorsing the standing IFRS, and any modifications to the standards in the future. The endorsement process is a long one that involves three independent financial standards committees and the European Parliament in vetting each new principle.
"The EU endorsement process has resulted in several incidents that raise serious questions about whether the process impairs the independence of the IASB," Mahoney wrote in the CII letter. He cites two instances--in 2005 and again in April of this year--when one of the independent committees recommended against a proposed change to IFRS, causing the measure to be delayed indefinitely or withdrawn.
Auditing firm PricewaterhouseCoopers has acknowledged that the endorsement process is a key factor in influencing international standards, but the firm stated in a July report that "EU adoption is a delay but otherwise not a concern."
Among the U.S. companies that submitted comments to the SEC, none specifically mentioned the EU role in endorsing IFRS. The tone amid companies commenting on the idea of using IFRS in the U.S. was almost entirely positive and welcoming of a single global standard.
Some issuers--like Cisco Systems and United Technologies--wrote that they were eager to see the FASB play a significant role in setting a global financial reporting standard. The two companies also questioned the financial independence of the IASB in their comment letters.
In an effort to include input from other governments, Charlie McCreevy, European Commission internal markets commissioner, met with SEC Chairman Christopher Cox, Japan's Financial Services Agency Commissioner Takafumi Sato, and Executive Committee Chair Jane Diplock of the International Organization of Securities Commissions. According to a Nov. 6 press release, the officials intend to create an international monitoring body that helps choose board members for the IASB.
Mahoney of the CII warns that this move would only ensure more influence from political appointees who may not have investment or auditing experience.
"We believe that, at minimum, four members of the IASB should be drawn from the ranks of pension fund investment advisors, equity security financial analysts … or other users of financial reports," Mahoney wrote.
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Thursday, November 15, 2007 |
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Is US GAAP at a Tipping Point?
Submitted by: Marc Siegel, Head of Accounting Research
The SEC is holding an open meeting today to discuss the possibility of eliminating a reconciliation to US accounting rules for those companies who report in international standards. This is an important step along the path of U.S. companies adopting international accounting standards and moving away from US GAAP. This could mean U.S. accounting rules are going to become less relevant and over time U.S. companies will migrate to international rules. It's a controversial issue, and RiskMetrics Group's Financial Research and Analysis unit issued a note on the topic yesterday.
To access the note, Tipping Point for US GAAP, please visit the Accounting Section of RiskMetrics Group's Knowledge Center. We welcome your thoughts on this topic.
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Thursday, October 4, 2007 |
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Identifying European Non-Financial Companies with Potential Higher Exposure to an Adverse Credit Environment
Submitted by: Hemant Agarwal, Financial Research and Analysis Team
In the current credit environment, which European companies are more likely to be affected given their exposure to debt capital? To answer, RiskMetrics Group's Financial Research & Analysis team has sliced the universe of European companies (greater than $500 million market cap) in 3 different ways.
1) Companies which have higher short-term debt exposure and poor cash flow - We found 58 such companies, of which 5 had short-term debt in excess of 40% of their total capital.
2) Companies with overall high debt exposure and poor liquidity profile - These companies may potentially be in danger of breaching their debt covenants. We identify 28 such companies, of which 16 had negative free cash flow in either the last fiscal year or last 12 month period, or both.
3) Companies using debt capital to finance their acquisition driven growth - The current credit crunch may constrain these companies' near term growth prospects. We identify 18 such companies ; the ratio of debt/capital at three of these companies increased by more than 3000 bps in the last three years.
To learn more about European companies with higher exposures to an adverse credit environment , please join us for a webcast on Tuesday, October 9 at 11:30 a.m. EDT. We'll go over the findings from our new report, Identifying European Non-financial Companies with Potential higher Exposure to an Adverse Credit Environment. To register, please click here.
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