FASB Accounting Standards Codification Expected to Officially Launch July 2009
On July 1, 2009, the FASB Accounting Standards Codification™ is expected to officially become the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP), superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and related literature. While the Codification does not change GAAP (it only introduces a new structure that is expected to be more user-friendly), it will reorganize the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and will display all topics using a consistent structure. Additional information is in FASB’s news release.
Joint Agencies Approve Final Rule on Deduction of Goodwill from Tier 1 Capital
The federal bank regulatory agencies (FRB, FDIC, OCC and OTS) have adopted final rules amending their regulatory capital rules to permit banks, bank holding companies and savings associations to reduce the amount of goodwill that a banking organization must deduct from tier 1 capital by the amount of any deferred tax liability associated with that goodwill. For a banking organization that elects to apply this final rule, the amount of goodwill the banking organization must deduct from tier 1 capital would reflect the maximum exposure to loss in the event that such goodwill is impaired or derecognized for financial reporting purposes. Banking organizations may elect to apply this final rule for purposes of the regulatory reporting period ending December 31, 2008.
Fair Value Accounting
As we reported a few months ago, the SEC, et al., were required by the Emergency Economic Stabilization Act to study the efficacy of fair value or mark-to-market accounting and to report findings and recommendations to Congress. Yesterday, the SEC issued a 211 page report which recommends modifications to the existing accounting framework; not a full repeal of mark-to-market accounting. This represents a victory for FASB and other accounting related organizations which supported retaining the existing framework and is a set back to the ABA and others who sought complete revocation of fair value accounting.
H.R. 7327 – The Worker, Retiree and Employer Recovery Act of 2008
The Worker, Retiree and Employer Recovery Act of 2008 (H.R. 7327) was passed by the House on December 10, 2008, by the Senate on December 11, 2008 and has been sent to the President for signature. While the Act primarily makes technical changes to the Pension Protection Act of 2006, it also provides some relief from required minimum distribution rules and funding difficulties created by the current economic downtown and includes other provisions. Groom Law Group published a memorandum summarizing provisions that are likely to be of interest to sponsors and administrators.
H.R. 7300 and S. 3692 – Limiting Effect of IRS Notice 2008-83
Two pieces of legislation were introduced in the 110th Congress to limit the effect of IRS Notice 2008-83, 2008-42 I.R.B. (the Notice), in which the IRS announced that losses and deductions attributable to loans or bad debts of a bank (including any deductions for a reasonable addition to a reserve for bad debts) that are otherwise allowable after the date of an ownership change under IRC Section 382 will not be treated as built-in losses or deductions attributable to a pre-change period. The Notice effectively removed a potential barrier to bringing in new equity ownership of a struggling bank by assuring the acquiring-taxpaying banks that the IRS does not intend to challenge otherwise allowable deductions as being attributable to pre-ownership change periods.
Senator Bernard Sanders (I-VT) introduced S. 3692 which would declare the Notice “null and void and of no effect. The Internal Revenue Code of 1986 shall be applied and administered as if Treasury Notice 2008-83 had never been issued.” Representative Lloyd Doggett (D-TX) introduced H.R. 7300 to overrule the Notice. However, the Doggett bill would not affect bank mergers that already had taken place under the guidance, while the Sanders bill would nullify the notice altogether. Related, on December 4, Rep. Doggett along with eight other Democratic members of the House Ways and Means Committee wrote a letter directly to Treasury Secretary Paulson to express their concerns about expanding the Notice. This was in response to a November 14 letter from the Institute of International Bankers to the Treasury to consider extending the Notice provisions to foreign banks. We will continue to monitor related developments.
Credit Default Swap Regulation Update
Credit default swaps (CDS) are unregulated derivative products that have been blamed by many for spreading the risk of bad mortgages and weakening the global financial system. Once again, there are now many discussions about who and how to best regulate CDS. In the future it could be regulated by multiple agencies including the Federal Reserve, the Commodities Futures Trading Commission and the Securities and Exchange Commission. Major issuers and participants within the CDS market, and exchanges are vying to create a central clearing infrastructure for credit default swaps. The Intercontinental Exchange and the Chicago Mercantile Exchange, regulated by the Federal Reserve and CFTC respectively, are both interested in being the clearinghouses for the market.
In September, New York Governor Patterson made announcements that the State Insurance Department (SID) would begin to regulate financial guarantee insurers (FGI) and other financial services providers who participate in the CDS market. The new rules which were proposed to begin January 1, 2009 would require entities engaging in the business of credit default swaps to be licensed; increase the amount of financial reserves that FGIs would be required to maintain in order to engage in certain CDS transactions; limit the types of investments that they could insure; increase accounting and reporting standards to afford greater oversight by the by the SID; and restrict aggregate investment portfolios to investment grade securities or better.
Eric Dinallo, Superintendent of the New York State Insurance Department, announced that in light of progress being made to create central counterparties for the CDS market with federal oversight, New York would delay its plan to regulate certain CDS. Mr. Dinallo has recently stated that New York’s Insurance Department considers covered CDS transactions to be insurance products, and has made it clear that in the absence of appropriate central clearing and federal regulatory oversight, New York’s Insurance Department will act to regulate covered CDS transactions (he has not ruled out state regulation and oversight of covered CDS once the federal framework for the broader CDS markets is known).
Life Insurer Capital Levels
In our November LRA, we mentioned the National Association of Insurance Commissioners (NAIC) quarterly meeting that took place December 5th – 8th. Among other matters considered at the meeting, the NAIC, partly at the prompting of the American Council of Life Insurers (ACLI), considered providing life insurance companies reserve and capital relief. Some relief is directed toward specific lines of life insurance policies and variable annuity contracts (e.g., those variable annuities offering minimum guaranteed benefits). One recommendation included changing statutory accounting requirements to follow GAAP rules regarding recognition of the Deferred Tax Asset. The NAIC reviewed the ACLI suggestions in a closed session at the quarterly meeting. The NAIC has been publicly criticized for considering easing risk based capital requirements, especially behind closed doors. Among organizations registering opposition to the proposed changes, and the process undertaken to consider them, are the Consumer Federation of America and the Center for Economic Justice.