June 20, 2008

Commissioner Watch: The Washington Waiting Game Continues

With the first day of summer upon us tomorrow, the confirmation process for the three SEC nominees continues to drag on. Following the June 3rd hearing of the Senate Committee on Banking, Housing, and Urban Affairs, it seems likely that action on the nominations will proceed, although how quickly is anybody’s guess. At this point, there seems to be at least some expectation that the new Commissioners could be on board by the end of this month.

As discussed in this Bloomberg article by Jesse Westbrook, the nominees all indicated an interest in considering the issue of proxy access, and they also supported increased scrutiny of credit rating agencies.

Not everyone wants to see a speedy resolution to the appointment process. As noted in a recent issue of RiskMetrics’ Risk & Governance Weekly, AFSCME has been urging a delay in confirming the nominees so that the next president can select the Commissioners for the three open seats.

The Risk & Governance Weekly piece notes:

“The American Federation of State, County, and Municipal Employees (AFSCME) is calling on the Senate to hold off confirming the three nominees and allow the next president to fill those SEC vacancies.

‘It’s a five-year term [for SEC commissioners], and the next president should have the choice,’ said Richard Ferlauto, the union’s director of pension and benefit policy.

‘We don’t see any advantages’ to filling those vacancies now, said Ferlauto, who noted that the Republicans would still hold a majority on the commission. ‘That would give the green light to Chairman Cox to continue his deregulatory mission at the SEC.’

AFSCME also is specifically opposing Paredes’ bid to serve on the SEC. ‘He has a long track record of opposing the fundamental principles of investor protection . . . and shouldn’t serve on the commission,’ Ferlauto told Risk & Governance Weekly.

If presumptive Democratic presidential nominee Barack Obama is elected in November, he would be able to appoint a new SEC chairman, which would give Democrats a 3-2 majority on the commission.”

More FASB Action: Accounting for Hedging Activity

Over the past 10 years, there has probably been no better course of action for financial statement preparers than to avoid hedge accounting like the plague. In terms of complexity, the hedge accounting model in FAS 133 has topped the charts since its adoption. The Standard includes many traps for the unwary, including the “shortcut method,” which is perhaps the accounting equivalent of skydiving without a parachute in terms of risk profile.

Earlier this month, the FASB issued an Exposure Draft of a proposed statement that would amend FAS 133 to completely revamp the hedge accounting model. Under the proposed Statement, a fair value approach to hedge accounting would be established, eliminating many of the complicated elements that exist under the Standard today, including bifurcation-by-risk, the shortcut method, critical terms match, and the requirement to quantitatively assess effectiveness in order to qualify for hedge accounting. While a fair value approach has its own issues, the proposed changes would likely substantially simplify the accounting for hedging activities.

On the convergence front, while the proposed Statement diverges from the hedge accounting requirements of IAS 39, Financial Instruments: Recognition and Measurement, the International Accounting Standards Board has taken up a project to revamp its own hedge accounting standards, including consideration of an alternative comparable to the FASB’s proposed approach.

The FASB intends to issue a final Statement by the end of this year, with the amendments becoming effective for financial statements issued for fiscal years beginning after June 15, 2009, and interim periods within those fiscal years. Comments on the proposed Statement are due by August 15, 2008.

Risk Factor Disclosure at Technology Companies

In this podcast, Doug Sirotta, a Partner in the Technology Practice at BDO Seidman, discusses BDO’s recently released report on the risk factor disclosure of the top 100 technology companies, including:

– Why was this study undertaken?
– What were the major findings?
– Were there any surprises?
– What practice pointers are there for companies in the wake of the study?

– Dave Lynn