Raw Finance

Common sense economic and financial industry analysis for everyone, from banking and investment professionals to individual investors.

Archive for April, 2009

Next Entries »

IRA Investments: Summary of Prohibitions

Posted by Gregg Killoren on April 9, 2009

Self-directed IRAs enable their owners to pursue a variety of investments beyond the more customary mutual funds, stocks and bonds to which traditional IRAs are limited. The goal is to achieve a return on investment that betters the returns generally provided by more traditional investment vehicles. While self-directed IRAs account for less than 2 percent of the country’s $4.2 trillion in IRA funds, four of the largest custodians of self-directed IRAs—Fiserv, Sterling Trust, Equity Trust, and Entrust Administration— report that the volume has soared in the last five years.

Recently, both the Wall Street Journal and New York Times have published articles featuring the advantages of self-directed IRAs and highlighting some of the more exotic investment choices made by certain IRA holders, such as musical instrument rentals. Other examples of investments made by individuals through self-directed IRAs include real estate, mortgage loans, startup businesses, foreign businesses, private jets and even racehorses. However, while the universe of possible investments is seemingly limitless, the IRS has imposed a few prohibitions and requirements. A self-directed IRA owner’s failure to heed the IRS rules may have serious tax consequences for the plan’s assets.

Prohibited Transactions

Under Code Sec. 408(e)(2), the assets of an IRA plan must be invested to benefit only the IRA plan itself. Thus, the IRA owner may not use the assets in a self-serving or self-dealing manner. In general, Code Sec. 4975 prohibits IRA plans from selling, leasing or lending property and from providing goods and services to disqualified persons. The definition of a disqualified person includes: the IRA owner, the IRA owner’s spouse, the IRA owner’s ancestors and lineal descendants (for example, parents and children), spouses of the IRA owner’s lineal descendants (that is, son- or daughter-in-law), investment managers and advisors, anyone providing services to the IRA (such as the IRA trustee or custodian) and any corporation, partnership, trust or estate in which the IRA owner has a 50-percent or greater interest. A determination of self-dealing is made based on the facts and circumstances of each case and thus may be highly subjective.

Engaging in a prohibited transaction results in a loss of the IRA’s tax-exempt status, and the IRA owner is deemed to have received a total distribution on the first day of the tax year in which the prohibited transaction occurred. This constructive distribution must be included in the individual’s income for the year and is subject to a 10-percent penalty on premature distributions for individuals, except those who have reached age 59 ½ or are disabled. Any income earned by the account is also taxed to the individual.

Prohibited Investments

In addition to prohibiting certain transactions, the IRS has also banned IRA plans from investing in certain assets. No part of an IRA plan’s assets may be invested in life insurance, under Code Sec. 408(a). Also, in a private letter ruling, the IRS has prohibited an IRA from investing in S corporation stock.

Further, Code Sec. 408(m) generally bars an IRA plan from investing in collectibles. The term “collectible” includes any work of art, rug, antique, metal, gem, stamp, coin, alcoholic beverage or other item of tangible personal property specified by the IRS. The term “collectible” does not include certain gold, silver or platinum coins or any gold, silver, platinum or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market requires for metals that may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee.

If an IRA does invest in collectibles, the IRA is considered to have made a distribution in an amount equal to their cost. However, the IRA plan would not otherwise lose its tax-exempt status.

Unrelated Business Taxable Income

Finally, the owner of a self-directed IRA must be aware of unrelated business taxable income (UBTI). IRAs are taxed on UBTI, which is defined as income less allowable deductions from any regularly carried trade or business that is not substantially related to the IRA’s purpose of providing retirement income for the IRA owner. An unrelated business is defined as any trade or business that is not substantially related to the purpose or function of the trust and is regularly carried on by such trust, for example an IRA, or by a partnership of which it is a member. Sources of UBTI are business operations, partnerships and debt-financed property.

Income derived from UBTI is not tax-deferred, and consequently the IRA plan must pay current taxes, usually quarterly, on such income. Any UBTI tax due must be paid from self-directed IRA assets, not by the IRA owner. If the IRA owner pays the tax, it is considered an IRA contribution, subject to the contribution limits.

Posted in Individual Retirement Accounts, Investing, Personal Finance | Tagged: , , | Leave a Comment »

Taking The Market’s Temperature: Review of Important Economic Indicators (4-7-09)

Posted by Gregg Killoren on April 7, 2009

The U.S. equity market has rallied off its lows by more than 20 percent, and now first quarter 2009 earnings season is upon us.  Is hope for the economic future warranted?  The 1Q earnings will not tell us much by itself; earnings are expected to be pretty bad.  Analysts are hoping to glean something from the forecasts offered for the upcoming quarters, but, what CEO is going to go out on a limb and make a firm prediction?  Even if one or more does, can it really be believed?  Are the governments efforts to shore up the banking system working?  So many questions.

Where do we find answers?  There are a few places to look in the economy right now to determine whether there is any hope for the upcoming quarters:

  1. Credit Spreads (LIBOR-OIS, TED) - whether banks are willing to lend and credit markets are liquid is essential to economic expansion;
  2. Copper – this base metal is key to manufacturing;
  3. Oil – everything runs on oil;
  4. Baltic Dry Index – a measurement of global shipping costs – when these costs rise, demand is up;
  5. Average hours worked – more work being done means that there is more work to do (i.e. hours up = demand for goods up).

All of the charts and stats are listed below.  Credit spreads have eased a little bit after creeping up in February and March.  However, they remain elevated, so the prospects for borrowing are still negative.  Copper has formed a nice uptrend, but this may be more a reflection of China’s efforts to jumpstart its economy, rather than an expectation for global (or U.S.) growth.  Oil, like copper, bounced nicely off its lows, but it now seems to be trading sideways, an indication of indecision in the market.  Similarly, after spiking off a low, the Baltic Dry Index, is sinking a bit.  Finally, average hours worked continue in a slow decline, but average earnings rose a little.

While there are signs of recent improvement, or at least hope that the economy may turn around in these indicators, it seems that the stock market rally may have followed the trends in copper, oil and the Baltic Dry Index.  If that continues, we can expect the market to trade sideways or give back some of the gains.  As credit remains tight, however, there is little reason to be too optimistic about the future.

Libor-OIS Spread

The LIBOR-OIS spread is used by economists and financial analysts as a measure of the availability of cash among banks.  The higher the spread, the fewer available dollars. The London Inter-Bank Offered Rate (LIBOR) is the interest rate that banks charge each other for three-month loans in U.S. dollars.  The rate is set by a panel of banks in a survey by the British Bankers’ Association each day around noon in London.  LIBOR is also used as a benchmark for approximately $360 trillion of financial products across the globe.  The overnight indexed swap (OIS) rate is an interest rate swap transaction in which the overnight rate is exchanged for a certain fixed rate.

http://www.bloomberg.com/apps/chart?h=152&w=240&range=1y&type=gp_line&cfg=BQuote.xml&ticks=.LIBOIS%3AIND

TED Spread

The TED spread, which is the difference between what the government and companies pay for three-month loans.  As of April 7, 2009, the TED spread has been bouncing between 95 and 97 basis points (.95 to .97 percent).  It rose to 103 basis points (1.03 percent) on March 18, 2009, compared with 94 basis points (.94 percent) on Feb. 13, 2009, and a record high of 464  basis points (4.64 percent) on Oct. 10, 2008.  The gap averaged 27 basis points (0.27 percent) from 2002 through 2006, before the credit crisis began in 2007.


 

Copper

 

Oil

 

 

Baltic Dry Index

 

Average Hours Worked

Weekly Hours (Establishment Survey Data) In March, the average workweek for production and nonsupervisory workers on private nonfarm payrolls fell by 0.1 hour to 33.2 hours, seasonally adjusted--the lowest level on record for the series, which began in 1964. The manufacturing workweek decreased by 0.2 hour to 39.3 hours, and factory overtime was unchanged at 2.7 hours. (See table B-2.) The index of aggregate weekly hours of production and nonsupervisory workers on private nonfarm payrolls fell by 1.0 percent in March. The manufacturing index declined by 2.1 percent over the month. (See table B-5.) Hourly and Weekly Earnings (Establishment Survey Data) In March, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls rose by 3 cents, or 0.2 percent, seasonally adjusted. This followed a gain of 4 cents in February. Over the past 12 months, average hour- ly earnings increased by 3.4 percent, and average weekly earnings rose by 1.5 per- cent. (See table B-3.)

 

 

 

Posted in Credit Crisis, Credit Spreads, Economy, Indicators, Investing, Market Commentary, Personal Finance, Stocks | Tagged: , , , , , , | Leave a Comment »

Non-Farm Payroll Employment in March 2009 Drops 652,000 [Revised June 5, 2009]

Posted by Gregg Killoren on April 3, 2009

The unemployment rate rose in March to 8.5 percent as companies shed 663,000 [revised to 652,000 on June 5, 2009]  jobs during the month.  Although no area was spared, manufacturing, construction and temporary jobs were hit hardest.

Below is the full statement from the Commerce Department’s Bureau of Labor Statistics (full information will be posted on the Economic and Financial Statistics page soon):

   Statement of
                               
                          Keith Hall
                          Commissioner
                  Bureau of Labor Statistics
                               
                          before the
                    Joint Economic Committee
                    UNITED STATES CONGRESS
                               
                      Friday, April 3, 2009
                               

Madam Chair and Members of the Committee:

    Thank you for the opportunity to discuss the employment and
unemployment data we released this morning.
   
    Labor market conditions continued to deteriorate in March.
Total nonfarm payroll employment decreased by 663,000, and the
unemployment rate increased from 8.1 to 8.5 percent.  Since the
beginning of the recession in December 2007, job losses have
totaled 5.1 million, 3.3 million of which occurred in just the
past 5 months.  These declines have been widespread across
industry sectors, but particularly sharp in manufacturing,
construction, and temporary help services.  Together, these
industries have accounted for nearly two-thirds of the job loss
during the recession.
   
    In March, manufacturing employment fell by 161,000, with job
losses spread throughout the sector.  Since the start of the
recession, manufacturing has shed 1.5 million jobs, with about 60
percent of the loss occurring in the past 5 months.  In March,
the average workweek in manufacturing decreased by
two-tenths of an hour.
   
    Construction employment declined by 126,000 over the month.
Since the beginning of the recession, employment has dropped by
about 1.1 million, with more than half of that total occurring in
the past 5 months.
   
    In March, employment continued to contract throughout most
of the service-providing sector.  Temporary help services
employment shrank by 72,000 over the month.  Employment in the
industry is down by about three-quarters of a million since the
recession began, with over half of that coming in the past 5
months.  In March, other large job losses occurred in retail
trade (-48,000), financial activities (-43,000), transportation
and warehousing (-34,000), accommodation and food services
(-32,000), and wholesale trade (-31,000).
   
    Health care employment continued to trend up in March,
although the pace of job growth appears to have slowed in the
past 3 months.  In the first quarter of 2009, the industry added
an average of 17,000 jobs per month, compared with a monthly
average of 30,000 in 2008.
   
    Average hourly earnings for production and nonsupervisory
workers in the private sector rose by 3 cents in March, or 0.2
percent.  Over the past 12 months, average hourly earnings have
increased by 3.4 percent.  From February 2008 to February 2009,
the seasonally adjusted Consumer Price Index for Urban Wage
Earners and Clerical Workers (CPI-W) fell by 0.5 percent.
   
    The major indicators from our household survey also reflect
weaker labor market conditions.  In March, the unemployment rate
rose by four-tenths of one percentage point to 8.5 percent, and
the number of unemployed persons reached 13.2 million.  Since the
recession began in December 2007, unemployment has surged by 5.6
million; job losers have accounted for about 80 percent of the
increase, with returning workers and new entrants to the labor
market making up smaller portions.
   
    In March, the number of individuals experiencing long spells
of joblessness rose by 265,000 to 3.2 million.  Nearly one in
four of the unemployed had been jobless for 27 weeks or more, the
highest ratio since mid-1983.
   
    Over the month, the employment-population ratio slipped to
59.9 percent, 2.8 percentage points lower than at the beginning
of the recession and the lowest level since July 1985.  Among the
employed, the number of persons working part time who would
prefer to be working full time increased by 423,000 over the
month to 9.0 million.  Since December 2007, this measure has
risen by 4.4 million.
   
    Summarizing the labor market developments for March, payroll
employment fell by 663,000, and the unemployment rate climbed to
8.5 percent.  Since the beginning of the recession in December
2007, job losses have totaled 5.1 million.

Posted in Economy, Employment Report | Tagged: , | Leave a Comment »

FASB Relaxes Mark-to-Market Accounting Rules

Posted by Gregg Killoren on April 2, 2009

The Financial Accounting Standards Board (FASB) today voted to relax the mark-to-market accounting rules that some in Congress have criticized for compounding the credit crisis.  While this is not a blog about accounting rules, today’s FASB action is significant because the mark-to-market rules are involved in the pricing issues surrounding the so-called “toxic” assets held by banks.

What is Mark-to-Market?

Put simply, mark-to-market accounting rules require that an asset be priced at its current in the market as it is.  The problem for banks is that the market for the derivatives that many of them hold has disappeared, and there lies the uncertainty that has roiled the credit markets and in large part caused the credit crisis.  When a market becomes dysfunctional (or non-functional) the assets normally traded in that market must be priced at “fire-sale” prices.  What are those?  Well, that depends on one’s interpretation as to what the price of an asset would be if there were a forced sale of that asset.  On one hand, the math is easy, the lowest price is zero.  But then, these assets still have some value.  So the price is between zero and some number that is much lower than the value one year ago.  That’s why no one can figure out which banks are insolvent and which are healthy enough to survive.  We need to ascertain a price for the toxic assets and then see where each bank’s balance sheet stands, above or below the water line.

The Treasury’s Public-Private Partnership Investment Program was supposed to create a market for the toxic assets by offering government incentives for private investors to participate.  But Congress decided instead to pressure FASB to relax the mark-to-market accounting rules, which they now have.  So now what?

FASB’s Decision

At the end of this post I have reproduced the summary of FASB’s as posted on its website.  After that is an analysis from Fitch Ratings, which favors the new rules.  Here are some key points: 1) Rules effective Q1 2009; 2) FASB says the objective of mark-to-market accounting is to set a price that would be received by a bank in an “orderly” transaction in the current, inactive market. It says an “orderly” transaction for accounting purposes does not include the forced liquidation or a distressed sale of an asset; 3) FASB agrees to drop the presumption in mark-to-market accounting that all transactions in an inactive market are distressed unless proven otherwise; 4) FASB clarifies when banks are required to take write downs on impaired assets, letting them record smaller losses on their income statements –> see Theoretical Aspect of Fair Value and Mark-To-Market Accounting: Is There A Better Alternative?

It appears that now banks can essentially imagine a functioning market and plug in whatever price they think the assets should be worth, rather than facing the reality that they are probably worth next to nothing.  As someone with an economics background, I can appreciate that.  Economists generally make grand assumptions to fit their theories.  My biggest concern here is how does this help matters?  It would seem that Treasury’s PPPIP program would be severely weakened.  Why would banks sell their assets when they can pretend there’s nothing wrong and wait for some future date when those markets return to normal.  The stock market was certainly happy about this turn of events today (DJIA was up over 200 points to nearly 8,000), as financials jumped on the news.  I guess since they no longer have to report losses, they’re suddenly worth more?  This all just seems like the same kind of fiction that got us into the credit crisis in the first place.

Most of my comments here are pure conjecture.  For a more detailed analysis of the view expressed here, see an article by William Buiter, Professor of European Political Economy, London School of Economics and Political Science, on his blog, Maverecon.  Here is an excerpt from Buiter’s post:

Basically, the new guidance allows banks to shift a whole load of toxic and impaired securities from level 2 to level 3.  Up till now, a frequent source of level 2 information were prices achieved by competitors’ asset sales to help determine the fair-market value of similar securities they hold on their own books. Banks are now allowed to ignore prices achieved in competitors’  asset sales when these transactions aren’t “orderly”.  This includes transactions in which the seller is near bankruptcy or needed to sell the asset to comply with regulatory requirements.  This is vague and broad enough to drive a coach and horses through fair-value accounting for most imperfectly liquid assets.

Leaving the valuation of illiquid securities to managerial discretion will lead to systematic and systemic overvaluation.  Banks with significant amounts of toxic assets and plain bad assets on their balance sheet have lied, lie and continue to lie about what they have on their balance sheets.  This has now been made easier.  No wonder bank stocks rose and bank credit default swap rates declined.  Reported asset values will be boosted.

There is only one way, in my mind, to see whether this and other efforts are making a difference, and that is to look to credit spreads.  If credit spreads drop back to their pre-crisis levels, then maybe happy days are here again indeed.  My next post will take the pulse of the credit markets.

 

SUMMARY OF BOARD DECISIONS

Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final standard.

April 2, 2009 Board Meeting

Determining whether a market is not active and a transaction is not distressed. The Board discussed comment letters received on proposed FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed. In response to comment letters and additional feedback received, the Board decided to make significant revisions to the proposed FSP. The Board decided that the final FSP would

  1. Affirm that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions (that is, in the inactive market).
  2. Clarify and include additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active.
  3. Eliminate the proposed presumption that all transactions are distressed (not orderly) unless proven otherwise. The FSP will instead require an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence.
  4. Include an example that provides additional explanation on estimating fair value when the market activity for an asset has declined significantly.
  5. Require an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the FSP and to quantify its effects, if practicable.
  6. Apply to all fair value measurements when appropriate.

The Board also affirmed its previous decision that the FSP would be applied prospectively and that retrospective application would not be permitted. The Board decided that the FSP would be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Board decided that an entity early adopting this FSP must also early adopt FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments. Additionally, if the entity elects to early adopt FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, it must also elect to early adopt this FSP and FSP FAS 115-2, FAS 124-2, and EITF 99-20-2.

The Board directed the staff to proceed to a draft of the final FSP for vote by written ballot.

Recognition and presentation of other-than-temporary impairments. The Board discussed comment letters received on proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments. The Board made the following decisions in response to comment letters and additional feedback received:

    1. The Board decided that the change to existing guidance for determining whether an impairment is other than temporary should be limited to debt securities.
    1. The Board decided to replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert
      1. It does not have the intent to sell the security; and
      2. It is more likely than not it will not have to sell the security before recovery of its costs basis.
    2. The guidance will incorporate examples of factors from existing literature that should be considered in determining whether a debt security is other-than-temporarily impaired and how those factors interact with the requirement to assert that the entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis.
    3. When an entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.
    4. An entity will be required to recognize noncredit losses on held-to-maturity debt securities in other comprehensive income and amortize that amount over the remaining life of the security in a prospective manner by offsetting the recorded value of the asset unless the security is subsequently sold or there are additional credit losses.
    5. The FSP will include guidance stipulating that credit losses should be measured on the basis of an entity’s estimate of the decrease in expected cash flows, including those that result from an increase in expected prepayments.
    6. The guidance will clarify that existing premiums or discounts and subsequent changes in estimated cash flows or fair value should continue to be accounted for in accordance with existing guidance (for example, EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets”).
    1. An entity will be required to present the total other-than-temporary impairment in the statement of earnings with an offset for the amount recognized in other comprehensive income.
    2. An entity will be required to present separately in the financial statement where the components of other comprehensive income are reported, amounts recognized in accumulated other comprehensive income related to the noncredit portion of other-than-temporary impairments recognized for available-for-sale and held-to-maturity debt securities.
    1. The disclosure requirements of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, will be modified to require an entity to provide the following:
      1. The cost basis of available-for-sale and held-to maturity debt securities by major security type
      2. The methodology and key inputs, such as performance indicators of the underlying assets in the security, loan to collateral value ratios, third-party guarantees, levels of subordination, and vintage, used to measure the portion of an other-than-temporary impairment related to credit losses by major security type
      3. A rollforward of amounts recognized in earnings for debt securities for which an other-than-temporary impairment has been recognized and the noncredit portion of the other-than-temporary impairment that has been recognized in other comprehensive income.
    2. Statement 115 and FSP FAS 115-1 and FAS 124-1 will also be modified to require that major security classes be based on the nature and risks of the security and additional types of securities will be included in the list of major security types listed in Statement 115.
    3. The above additional disclosures, as well as all existing Statement 115 and FSP FAS 115-1 and FAS 124-1 disclosures, will be required for interim periods

    2. Scope

    Recognition

    Presentation

    Disclosures

When adopting the new guidance, an entity will be required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-temporary impairment from retained earnings to accumulated other comprehensive income if the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery. The cost basis used to calculate accretable yield will also be adjusted to reflect this adjustment (that is, the entity will no longer accrete the noncredit component of a previously recognized other-than-temporary impairment through earnings).

The Board decided that the FSP will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Board decided that an entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed. Additionally, if the entity elects to early adopt FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS 157-4, it must also elect to early adopt this FSP.

The Board directed the staff to proceed to a draft of the final FSP for vote by written ballot.

Interim disclosures about fair value of financial instruments. The Board redeliberated proposed FSP FAS 107-b and APB 28-a, Interim Disclosures about Fair Value of Financial Instruments, in light of comments received and decided to proceed to a final FSP.   The final FSP will amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require an entity to provide disclosures about fair value of financial instruments in interim financial information.

The Board affirmed its previous decision that the FSP would apply to all financial instruments within the scope of Statement 107. The Board also affirmed its previous decision to require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements.

The Board decided that only public entities would be required to provide the fair value disclosures in interim financial information.

The Board decided that the FSP would be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Board decided that an entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, and FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments.

The Board directed the staff to proceed to a draft of the final FSP for vote by written ballot.

Insurance contracts. The Board continued deliberating the joint project on accounting for insurance contracts by discussing what cash flows an entity would use in measuring the fulfillment value of an insurance contract.

The Board agreed that a measurement of the fulfillment value of an insurance contract should use expected cash flows rather than a best estimate of cash flows. The Board also agreed that those expected cash flows should be updated each period.

The Board discussed whether market inputs should be part of the measurement of cash flows when a fulfillment value notion is used. The Board agreed that the measurement of cash flows should consider all available information that represents the fulfillment of the insurance contract. All available information includes, but is not limited to, industry data, historical data of an entity’s costs, and market inputs when those inputs are relevant to the fulfillment of the contract.

Conceptual framework: objective and qualitative characteristics. The Board reviewed responses to the Exposure Draft, Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information, and tentatively affirmed the proposals in the chapter on Objective, including the proposals on the objective of financial reporting and the primary user group. The Board decided to clarify that financial reports do not necessarily exclude forward-looking or prospective information. The description of an economic phenomenon should be amended to reflect this decision.

The Board directed the staff to proceed to drafting:

  1. The final versions of the chapters on the objective of financial reporting and the qualitative characteristics of and constraints on financial reporting
  2. The Exposure Draft on the reporting entity concept.

Fitch: FASB’s Impairment and Fair Value Proposals – More Disclosure Would Benefit Investors
31 Mar 2009 1:02 PM (EDT)

Fitch Ratings-New York-31 March 2009: Fitch Ratings has released a special report in response to the Financial Accounting Standard Board’s (FASB) recent impairment and fair value proposals which suggests transparency and added disclosures by issuers would benefit investors.

Because much of both proposals hinge on either the intent and/or estimations provided by management, the proposed qualitative disclosures by themselves may not be sufficient for financial market professionals‘ understanding of the impairment and fair value conclusions reached by an issuer.

“Absent increased disclosures, investors and analysts may assume the issuer has taken the least conservative approach to valuation and impairment,” said Dina Maher, Senior Director, Fitch Ratings.

The FASB proposes to change the method for determining whether an investment is other-than-temporarily impaired and for identifying inactive markets and distressed transactions when measuring fair value.

Fitch believes that should these proposals be adopted, disclosures by issuers should be expanded to allow for thorough and meaningful analysis, regardless of the minimum requirements.

Fitch’s full report is titled “FASB Impairment and Fair Value Proposals — More Disclosures Would Benefit Investors” and can be accessed on the Fitch Ratings web site www.fitchratings.com. The report provides a summary and example demonstrating current and proposed accounting practices, as well as a description of the types of disclosures that would be helpful in analysis.

If you have trouble viewing the report please follow this link
http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=430894

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, ‘www.fitchratings.com’. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct‘ section of this site.

 

Contact: Dina M. Maher +1-212-908-9175, Sharon Haas +1-212-908-1362, New York; or Julie A. Burke +1-312-368-3158, Chicago.

Media Relations: Cindy Stoller, New York, Tel: +1 212 908 0526, Email: cindy.stoller@fitchratings.com.

Posted in Credit Crisis, Economy, Public-Private Investment Program | Tagged: , , | Leave a Comment »

Next Entries »