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2008 Banking Conference Banking GAAP Update September 25, 2008 Panelists Jason Jacobs, Partner, KPMG LLP Robert Malhotra, CPA, Professional Accounting Fellow, SEC Michael D. Smith, Partner, KPMG LLP Agenda Other-Than-Temporary Impairment Upcoming Amendments Interpretation 46R (VIEs)

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2008 Banking Conference

Banking GAAP Update

September 25, 2008

  • Panelists

  • Jason Jacobs, Partner, KPMG LLP

  • Robert Malhotra, CPA, Professional Accounting Fellow, SEC

  • Michael D. Smith, Partner, KPMG LLP


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Agenda

Other-Than-Temporary Impairment

Upcoming Amendments

Interpretation 46R (VIEs)

Statement 140

Other Areas

Loan Modifications—Statement 114

Fair Value

Goodwill Impairment

Debt Modifications

2



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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


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Other-Than-Temporary Impairment

Assessment considerations:

  • Equity Securities

    • Common Stock

    • Perpetual Preferred Securities

  • Debt Securities

    • Corporate Debt

    • Structured Debt (CDO’s)

    • EITF 99-20


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Other-Than-Temporary Impairment (con’t)

EITF 99-20:

  • Scope

    • 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


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Upcoming AmendmentsInterpretation 46R (VIEs) & Statement 140


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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

  • Disclosure

    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


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Loan ModificationsStatement 114


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Loan Modifications

Troubled Debt Restructurings (TDR)/FAS 114 Interaction:

  • Scope of FAS 114:

    • Paragraph 6 – All loans that are identified for evaluation, except:

      • Large groups of smaller-balance homogenous loans that are collectively evaluated

      • Loans measured at fair value or LOCOM

      • Leases as defined in FAS 13

      • 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”


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    Loan Modifications (con’t)

    Complexities of determining impairment under SFAS 114:

    • Adjustable rate mortgages have never been modified in such large numbers

    • Calculating “excepted future cash flows” if NPV method is used

      • Pre-payment/default assumptions

      • Discount rate to be used

      • Term to be used

      • Effective interest rate of the original loan

    • Disclosure requirements

  • Additional guidance




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    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.



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    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 separately)


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    Debt Modifications (con’t)

    Extinguishment

    • Upon extinguishment, an entity should recognize a gain or loss based on the difference between

      • carrying value of the debt, and

      • the reacquisition price

    • Extinguishment gains or losses generally should not be presented as extraordinary

    • FAS 140 indicates that debt is not extinguished until:

      • The debtor pays the creditor and is relieved of its obligation for the liability, or

      • The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor



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