KPMG On Screen Enhanced US by niusheng11


									2008 Banking Conference

   Banking GAAP Update
             September 25, 2008

Jason Jacobs, Partner, KPMG LLP
Robert Malhotra, CPA, Professional Accounting Fellow, SEC
Michael D. Smith, Partner, KPMG LLP

Other-Than-Temporary Impairment
Upcoming Amendments
  Interpretation 46R (VIEs)
  Statement 140
Other Areas
  Loan Modifications—Statement 114
  Fair Value
  Goodwill Impairment
  Debt Modifications


Other-Than-Temporary Impairment

  • Impairment assessment required when security is
    in an unrealized loss position
  • Positive assertion of ability and intent
  • Ability to hold should take into account
    • Liquidity and capital requirements
    • Investment policies
    • Quality of collateral required for pledged securities
  • SAB Topic 5M does not have the same tainting
    concept like SFAS 115’s sales from HTM

Other-Than-Temporary Impairment

Assessment considerations:
    • Equity Securities
         •   Common Stock
         •   Perpetual Preferred Securities
    •   Debt Securities
         •   Corporate Debt
         •   Structured Debt (CDO’s)
         •   EITF 99-20

Other-Than-Temporary Impairment (con’t)

EITF 99-20:
    Beneficial interests
    Excludes BI’s that are of high credit quality (Rated AA or
    better) and
    Cannot be contractually prepaid or settled where the BI
    holder would not recover substantially all its investment
 OTTI test based on a BI holder best estimate of cash
 flows that a market participant would use in determining
 the current fair value of the BI
 Adverse change in cash flows

Upcoming Amendments
Interpretation 46R (VIEs)
     & Statement 140

Upcoming Amendments

   SFAS 140:
     Remove the concept of a QSPE
     Remove the exception from applying FIN 46R to QSPEs

   FIN 46R:
     Amend the guidance for determining whether an enterprise must
     consolidate a SPE, including those previously considered QSPEs

    Also to be issued as an Exposure Draft is a proposed FASB Staff
     Position No. 140-e and FIN 46 (R)-e on Disclosures about Transfers
     of Financial Assets and Interests in Variable Interest Entities

Loan Modifications
  Statement 114

Loan Modifications

Troubled Debt Restructurings (TDR)/FAS 114 Interaction:
     Scope of FAS 114:
        Paragraph 6 – All loans that are identified for evaluation, except:
             a) Large groups of smaller-balance homogenous loans that are collectively
             b) Loans measured at fair value or LOCOM
             c) Leases as defined in FAS 13
             d) Debt securities as defined in FAS 115
        Paragraph 9 – Loans modified in TDRs, including those that were
        otherwise excluded from scope of FAS 114 under paragraph 6(a)
            For example, certain residential mortgage loans modified in accordance
            with the recent ASF Framework
     TDR—Defined in FAS 15:
        ―the creditor for economic or legal reasons related to the debtor’s
        financial difficulties grants a concession to the debtor that it would not
        otherwise consider‖

Loan Modifications (con’t)

Complexities of determining impairment under SFAS
    Adjustable rate mortgages have never been modified in such
    large numbers
    Calculating ―excepted future cash flows‖ if NPV method is
      Pre-payment/default assumptions
      Discount rate to be used
      Term to be used
      Effective interest rate of the original loan
    Disclosure requirements
 Additional guidance
Fair Value

Goodwill Impairment

Goodwill Impairment

SFAS 142
 In connection with adverse conditions in the credit markets,
 the market capitalization of many financial institutions has
 declined significantly.
 SFAS 142 requires that goodwill of a reporting unit, as
 defined, be tested for impairment on an annual basis, and
 between the annual tests in certain circumstances. With
 regard to testing goodwill for impairment in between the
 annual tests, paragraph 28 of SFAS 142 states:
     Goodwill of a reporting unit shall be tested for impairment
     between annual tests if an event occurs or circumstances
     change that would more likely than not reduce the fair value
     of a reporting unit below its carrying amount. Examples of
     such events or circumstances include a significant adverse
     change in legal factors or in the business climate.

Debt Modifications

Debt Modifications

EITF 96-19
  A substantial modification of debt should be
  accounted for like an extinguishment

 A modification is considered substantial if:
    The present value of the cash flows under the terms of the
    new debt instrument is at least 10% different from the
    present value of the remaining cash flows under the terms of
    the original instrument

 Analysis must be performed on a creditor by creditor
 basis (e.g., each bank in a syndicate must be analyzed

Debt Modifications (con’t)

 Upon extinguishment, an           FAS 140 indicates that debt is
 entity should recognize a gain    not extinguished until:
 or loss based on the                 The debtor pays the creditor
 difference between                   and is relieved of its
     carrying value of the debt,      obligation for the liability, or
     and                              The debtor is legally
     the reacquisition price          released from being the
                                      primary obligor under the
 Extinguishment gains or              liability, either judicially or by
 losses generally should not          the creditor
 be presented as extraordinary

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