FIRMA National Conference New Orleans 2009 FAS 157 Michael Daly VP Risk Management and Quality Control Union Bank of California.

Slides:



Advertisements
Similar presentations
Teaching Fair Value Measurement
Advertisements

Chapter 9--Learning Objectives
Fair Value Measurements
Statement 157 Measuring the Fair Value of Financial Assets
IFRS 13 Fair Value Measurement
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Reporting and Interpreting Investments in Other Corporations Chapter 12.
Generally Accepted Accounting Principles Common set of standards for U.S. accounting Not laws, but nearly treated as such Developed primarily by Financial.
© The McGraw-Hill Companies, Inc., 2006 Slide 10-1 Cash and Financial Investments.
1 FASB’s MOVE TOWARDS FAIR VALUE AND ACADEMIC RESEARCH Derivatives Contingencies Financial instruments Stock Options – 123R Guarantees – Int. 45 Fair value.
SFRS FOR SMALL ENTITIES
 3M is expected to pay paid dividends of $1.92 per share in the coming year.  You expect the stock price to be $85 per share at the end of the year.
Generally Accepted Accounting Principles
Theoretical Structure of Financial Accounting
FAS 157 And Fair Value Disclosures Acct 592. Materials & Labor Markets Manu- facturer Wholesale Market Dealer Retail Market Consumer 2 nd Hand Market.
13 Investments and Fair Value Accounting
1 Investments ACCTG 5120 David Plumlee. page2 Financial Instruments Any contract that Imposes on a 1st entity on potentially unfavorable terms with 2nd.
Page 0©2009 Clark Nuber. All rights reserved New Guidance on Accounting for GIK at Fair Value AERDO Conference December 7, 2009 Andrew Prather CPA Clark.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Foreign Currency Concepts and Transactions Chapter.
2-1 A FURTHER LOOK AT FINANCIAL STATEMENTS Financial Accounting, Sixth Edition 2.
Foreign Currency Transactions and Hedging Foreign Exchange Risk
Fair Value Measurement (SFAS 157)
© 1 Fair Value Measurements SFAS What Does SFAS 157 Accomplish? Defines fair value Establishes a framework for measuring fair value in GAAP Expands.
2 nd session: Introduction to Accounting. Firm of the Day 2.
Chapter 5 Balance Sheet and Statement of Cash Flow ACCT
Auxiliary Organizations Technical Update Mark Thomas, Partner KPMG LLP May 19, 2015.
 Business valuation is a logical, defendable process of arriving at the opinion as to the worth of a business given the information available, assumptions.
SHARING THE VISION™ Fair Value Under SFAS 157 Presented by: Daniel Chavez, CPA Audit Manager.
FAS 157 Fair Value Measurement Issued Sept 2006
Technical Update Mark Thomas, Partner KPMG LLP April 24, 2015.
Fair Value Measurement By: Associate Professor Dr. GholamReza Zandi
Auditing Fair Value Measurements. 2 General Challenges presented to auditors:  Obtain a sufficient understanding of the entity’s processes and relevant.
Measuring cash flows Prepared by: Muhammad zubair Muhammad zubair Roll# 7170 Roll# 7170 GOVERNMENT COLLEGE UNIVERSITY FAISALABAD BANKING & FINANCE.
Chapter Three Consolidations – Subsequent to the Date of Acquisition McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.
Subsidiary of Olsen Thielen & Co., Ltd. CPA Valuation De-mystified John Gurley Randy Schostag.
Introducing Accounting in Business ACG 2021: Chapter 1.
Management’s Role in Valuing Alternative Investments with NAV’s April 19, 2011.
0 ISDA ISDA Workshop – The practical implications of the new accounting rules 8 November 2004 ISDA International Swaps and Derivatives Association, Inc.
The Balance Sheet and the Statement of Changes in Stockholders’ Equity C hapter 4 COPYRIGHT © 2010 South-Western/Cengage Learning Intermediate Accounting.
Chapter 12 Exchange of non-monetary assets. exchange of non-monetary assets  Non-monetary assets and monetary assets  Monetary assets: currency held.
© Grant Thornton LLP. All rights reserved. FASB Statement 157: Fair Value Issues Impacting Financial Services Webcast Wednesday, February 27 th, 2008 The.
ACC 424 Financial Reporting II Lecture 13 Accounting for Derivative financial instruments.
CHAPTER Foreign Currency Transactions Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor, and Cheng 6 6.
March 31, 2008 Glen Hecht, Senior Manager, Ernst and Young Fair Value Measurement.
2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006.
FRAMEWORK FOR FINANCIAL REPORTING
Financial Accounting Fundamentals
11 Making Informed Judgments Part 10 Statistics, Measurement, and the Fair Value Hierarchy Navigating Accounting, ® G. Peter & Carolyn R. Wilson, ©
Fair Value Measurement By: Feras Alghamdi Shawneen Kelly Austin Tullos Meredith Whitaker.
CFA Institute Centre for Financial Market Integrity Remarks by Matthew Waldron, CPA CFA Society of Minnesota May 28, 2009.
ICPAK The Financial Reporting Workshop Comfy Hotel, Eldoret November 10, 2014 Fair Value Measurement- IFRS 13.
2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver 2007 Annual Meeting ● Assemblée annuelle 2007 Vancouver Canadian Institute of Actuaries Canadian.
2008 General Meeting Assemblée générale 2008 Toronto, Ontario 2008 General Meeting Assemblée générale 2008 Toronto, Ontario Canadian Institute of Actuaries.
Financed by a grant from Switzerland through the Swiss Contribution to the enlarged European Union Poland Financial Reporting Technical Assistance Program.
International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS.
Fair Value Definition Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
Chapter 4 Measurement PowerPoint Presentation by Matthew Tilling ©2012 John Wiley & Sons Australia Ltd.
May 19, 2016 GAAP MANUAL UPDATES AND REMINDERS Criselle Espiritu, Financial Reporting Analyst SFSR, Chancellor’s Office.
Chapter 10 Fair Value Accounting PowerPoint Presentation by Matthew Tilling ©2012 John Wiley & Sons Australia Ltd.
Intercompany Indebtedness
Chapter 2 Asset and Liability Valuations and Income Recognition.
The fair value standard and its audit impacts
Real Estate Institute of Zimbabwe
Conceptual Framework for financial reporting
Investments in Other Corporations
Fair Value Developments
A Accounting for Investments Principles of Accounting 12e APPENDIX
Fair value measurement
Quiz: Assets: fair value measurement
Fair value measurement
Mensuração de Valor Justo
Presentation transcript:

FIRMA National Conference New Orleans 2009 FAS 157 Michael Daly VP Risk Management and Quality Control Union Bank of California

What’s New?

Introducing FAS 157 The Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 157 provides direction for financial statements prepared in accordance with General Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 157 provides direction for financial statements prepared in accordance with General Accepted Accounting Principles (GAAP). The new Financial Accounting Standard is mandatory for financial statements prepared in accordance with GAAP Principles for fiscal years beginning after November 15, The new Financial Accounting Standard is mandatory for financial statements prepared in accordance with GAAP Principles for fiscal years beginning after November 15, 2007.

Introducing FAS 157 A principles based standard that provides limited implementation guidance. A principles based standard that provides limited implementation guidance. Proper disclosure will enable financial statement users to assess the assumption used in asset valuation. Proper disclosure will enable financial statement users to assess the assumption used in asset valuation.

The Concepts

Simplified

Fair Value Observable Inputs Unobservable Inputs Pricing Methodologies

Key Concepts Exit Price Market Based Principal and Most Advantageous Markets Nonperformance Risk

Conceptual Culprit Conceptual Culprit LIQUIDITY

“LIQUIDITY IS AN ILLUSION. It is always there when you don’t need it and rarely there when you do.” Michael Milken

Fair Value Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Inputs OBSERVABLE INPUTS = Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.

The Inputs UNOBSERVABLE INPUTS = Inputs that reflect the reporting entities own assumptions about the market, that participants would use in pricing the asset or liability based on the best information available.

The Fair Value Input Hierarchy LEVEL 1 – quoted prices (unadjusted) in active markets for identical assets. LEVEL 2 – observable for the asset or liability, either directly or indirectly. LEVEL 3 – unobservable and contain assumptions.

Pricing Methodologies Close of Market Close of Market Reference Data Reference Data Evaluation (dealer quotes, bond market activity, and other relevant information) Evaluation (dealer quotes, bond market activity, and other relevant information) Bid, Mean and Ask (generally a price adjustment to a bid price based on maturity, credit standing and trade frequencies) Bid, Mean and Ask (generally a price adjustment to a bid price based on maturity, credit standing and trade frequencies)

Exit Price Or Market Value - versus - - versus - Market Entry Value Market Entry ValueOr “Hypothetical Transaction” Value

Market Based Market inputs for evaluation include: Market inputs for evaluation include: - benchmark yields - reported trades - broker/dealer quotes - benchmark securities - etc.

Market Based The standard is very subjective for non-traded financial assets and liabilities. The standard is very subjective for non-traded financial assets and liabilities. In 2007, less than 1% of USD denominated debt trades on an average day – In 2008, as a result of the sub-prime crisis even less. In 2007, less than 1% of USD denominated debt trades on an average day – In 2008, as a result of the sub-prime crisis even less.

FAS 157 Prior to FAS 157, transaction price or entry price was assumed to represent fair value at initial recognition. Prior to FAS 157, transaction price or entry price was assumed to represent fair value at initial recognition. Today the exit price objective applies regardless of reporting entities intent and/or ability to sell the asset or transfer the liability. Today the exit price objective applies regardless of reporting entities intent and/or ability to sell the asset or transfer the liability.

FAS 157 Disclosure of pricing sources Disclosure of pricing sources (often what lurks beneath the vendor feed?) Tier I – “quoted prices (unadjusted) in active markets for identical markets” Tier I – “quoted prices (unadjusted) in active markets for identical markets” Tier II – “observable for the asset or liability, either directly or indirectly” [similar assets or markets] Tier II – “observable for the asset or liability, either directly or indirectly” [similar assets or markets] Tier III – “unobservable” Tier III – “unobservable”

Principal and Most Advantageous Markets PRINCIPAL MARKET = the market with the greatest volume and level of activity PRINCIPAL MARKET = the market with the greatest volume and level of activity MOST ADVANTAGEOUS MARKET = the market in which the entity would recognize the highest value, after considering transaction costs. MOST ADVANTAGEOUS MARKET = the market in which the entity would recognize the highest value, after considering transaction costs.

Non Performance Risk NONPERFORMANCE RISK = the risk that the obligation will not be fulfilled NONPERFORMANCE RISK = the risk that the obligation will not be fulfilled

The Re-think of Long Held Valuation Assumptions What about Hedge Funds? Generally calculated a “net asset value” Like mutual fund – but: More complexity of investmentsMore complexity of investments More uncertainty in pricing of investmentsMore uncertainty in pricing of investments Less reliability in valuation received.Less reliability in valuation received. Less liquidLess liquid ….and …. Unregulated.….and …. Unregulated.

The Re-think of Long Held Valuation Assumptions What about Investment Advisor Influence? Receiving prices directly from investment advisorsReceiving prices directly from investment advisors Multiple investment advisors pricing the same asset at different pricesMultiple investment advisors pricing the same asset at different prices Client disclosure of all price sources?

The Re-think of Long Held Valuation Assumptions What will be the effect on Forecasted earnings and communicating those results? Will there be a reduction in the number of transactions in certain asset classes?

Communicating the Components of Valuation and Performance

The “Bucketing Approach” Consideration of types or groups of securities to determine the pricing methodology, evaluated pricing applications and models, and other inputs that may have been used by pricing and reference data vendors.

Let’s Review

FAS 157 Buyer Beware to Buyer Aware Buyer Beware to Buyer Aware Disclosure Disclosure FASB (Financial Accounting Standards Board) FASB (Financial Accounting Standards Board) FAS 157 – new standard – new rules FAS 157 – new standard – new rules Fair value retains “exchange price notion” Fair value retains “exchange price notion” “exit price” – “not the price paid to acquire asset or liability” “exit price” – “not the price paid to acquire asset or liability”

FAS 157 Disclosure of pricing sources Disclosure of pricing sources (often what lurks beneath the vendor feed?) Tier I – “quoted prices (unadjusted) in active markets for identical markets” Tier I – “quoted prices (unadjusted) in active markets for identical markets” Tier II – “observable for the asset or liability, either directly or indirectly” [similar assets or markets] Tier II – “observable for the asset or liability, either directly or indirectly” [similar assets or markets] Tier III – “unobservable” Tier III – “unobservable”

A New Mantra

Communicate Valuation Methodologies Understand the Concepts Be Helpful and Accurate and Don’t Opine When Unclear - Escalate CYA