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Chuck Noski Named FASAC Chairman; MF Global Among Topics Discussed By Group

Last week, FASB’s parent body, the Financial Accounting Foundation, announced the appointment of Charles H. (‘Chuck’) Noski as Chairman of the Financial Accounting Standards Advisory Council (FASAC). Noski, appointed for a three-year term beginning Jan. 1, 2012, succeeds Dennis H. Chookaszian as FASAC Chairman.

The role and composition of FASAC, as noted on FASB’s website, is as follows:
 
The primary function of FASAC is to advise the Board on issues related to projects on the Board’s agenda, possible new agenda items, project priorities, procedural matters that may require the attention of the FASB, and other matters as requested by the chairman of the FASB. FASAC meetings provide the Board with an opportunity to obtain and discuss the views of a very diverse group of individuals from varied business and professional backgrounds.

The
members of FASAC are drawn from the ranks of CEOs, CFOs, senior partners of public accounting firms, executive directors of professional organizations, and senior members of the academic and analyst communities, all with an interest in the integrity of full and complete financial reporting and disclosure.
FEI President and CEO Marie N. Hollein is one of the members of FASAC, in addition to several other FEI members, some of whom serve on FEI’s Committee on Corporate Reporting.

Noski currently serves as Vice Chairman of Bank of America, where he rose to that position having formerly served as EVP and CFO . His prior experience includes serving as CFO of Northrop Grunman Corporation, Senior Advisor to the Blackstone Group, CFO and Vice Chairman of AT&T, CFO, President and COO of Hughes Electronics Corporation, and as an audit partner with Deloitte & Touche, in addition to serving as a board member at various companies.Noski is also an FEI member, and was among the inaugural class of inductees in the FEI Hall of Fame in 2006. 
 
Former FASB Chairman Denny Beresford (currently a professor at the University of Georgia and member of the PCAOB’s Standing Advisory Group), one of Noski's co-inductees in the FEI Hall of Fame in 2006, spoke highly of Noski’s appointment as FASAC Chair:
 
Chuck has a phenomenal background for his new position as FASAC Chairman given his many years as both a CFO and senior operating officer of major corporations, a director and audit committee chair of leading companies, and an audit partner with a Big 4 accounting firm.  I worked directly with Chuck many years ago in connection with some of those responsibilities and have kept in touch as he’s risen to become one of the most prominent financial executives in the country.  I’m delighted that he’s able to take on this important responsibility and know that FASAC will make an even greater contribution to the work of the FASB under his leadership. 

Given all of the challenges facing the Board (internationalization, major projects such as revenue recognition and leasing, and private company accounting, to name a few), it’s more important than ever that the FASB use its resources like FASAC to be sure that it is carefully monitoring and considering the views of its constituents
.

MF Global Collapse Among Topics Discussed by FASAC Members
FASAC generally meets four times a year, with its most recent meeting taking place last week. Items discussed and matters on which FASAC was briefed can be found in the board handout for the Dec. 8 FASAC meeting.
BNA’s Denise Lugo, reporting on remarks of the current FASAC Chairman, Chookaszian, in her article FASAC Chairman: MF Global's Accounting Method More Leveraged Than Lehman's (subscription required), noted:
 
Chookaszian, during FASAC's discussions with the Financial Accounting Standards Board, said the issues surrounding MF Global were “pretty complicated.”
 
“Everyone is aware of the alleged fraud that took place in the missing customer segregated funds, but the complexities behind it are pretty deep,” he said.
 
Comparing MF Global and Lehman Brothers, Chookaszian said that both firms used accounting that allowed off-balance-sheet assets. After the meeting, he told BNA the difference was that the leveraged factor in MF Global was much larger…
 
…The Securities and Exchange Commission has been investigating whether the accounting for MF Global masked in some fashion the true leverage of the firm. Specific to the accounting rules are the repo-to-maturity agreements (ASC 860), in particular whether the firm was not in compliance with the accounting rules or whether the guidance on repo-to-maturity agreements needs to be improved…

…Comparing the case with the Lehman case, Chookaszian …stated that in both cases they followed accounting standards, “and it will be argued and litigated for years as to whether it was right or wrong, but the point is in both cases they used accounting treatments that allowed the carrying of off-balance-sheet assets…
 
…Some FASB members questioned what accounting was applied for the forward repurchase agreement and whether that would have dealt with some of the leverage...
 
... FASB member Thomas Linsmeier [said]: “If the criteria for sales accounting are met you would derecognize the assets that were repo-to-maturity, but you're also supposed to be recognizing a forward repurchase agreement and a loss to the extent that there was a credit risk loss on those particular securities….” 
 
Another FASB member, Lawrence Smith…stated that there are very specific continuing disclosure requirements relative to those transactions “in terms of the continuing involvement with those parties, so there are a number of things that are required when you're accounting for a repo-to-maturity that I think is important not to overlook.”…
 
… “In any event I think it is pretty clear, it was not obvious as to how leveraged MF Global was,” Chookaszian said. “I think that's kind of the core issue—people did not realize how much leverage they had or the risks they were taking.”
 
Some FASAC members suggested that rather than whether or not the accounting was right, the issue was one that should have been taken into consideration during management discussion and analysis disclosures…
 
…“When you get a business model that … half your balance sheet's repo-to-maturity, that may be something that you want to highlight at least in a risk factor, in an MD&A discussion, and not rely on somebody reading page 253 of your 10K and footnote 23,” [FASAC member and Citigroup CFO John] Gerspach said.
NOTE: Although Gerspach’s page citation reference was theoretical, it made me curious about references to 'leverage' in MF Global's 2010 10-K.  Interestingly, there appear to be at least as many, if not more usages of the word ‘leverage’ in their 10-K with respect to ‘touchy-feely’ and other non-financial types of leverage like  “leverage our company’s strengths,” “leverage our skills and brand,” “leverage our core competencies,”  and “leveraged our clearing infrastructure,” than references to “leverage ratio” and financial leverage.
 
Here are a few excerpts of the discussion of financial leverage in MF Global’s 2010 10-K which do talk about financial leverage (these are just a few references to leverage, capital requirements and accounting, this is not a complete listing of all such references in their 10-K):  
 
Our plan seeks to take advantage of several trends and opportunities in the market for financial services. For example, the financial services industry continues to consolidate and the largest global investment banks and brokerage firms have increased their scale of operations, while at the same time new and proposed regulations and other trends have led global banks to de-leverage and reduce proprietary risks on their balance sheets. We believe that one result of these developments is that large investment banks have focused their attention, energy and capital on their largest clients, creating opportunities for us to service smaller and mid-sized clients that are currently underserved by larger firms….

…Our competitive landscape is also being altered by the impact of recent regulatory changes. Many financial institutions have sought to de-leverage and reduce proprietary risk on their balance sheets, creating opportunities for us and other firms to compete and meet outstanding demand for our products and services.
 
…The resale and repurchase transactions we enter into are generally collateralized with investment grade securities, including obligations of the U.S. government, government sponsored entity and federal agency obligations as well as European sovereign debt. Certain of these resale and repurchase transactions mature on the same date as the underlying collateral, and are accounted for as sales and purchases, in accordance with the accounting standard for transfers and servicing.

Under our repurchase agreements, including those repurchase agreements accounted for as sales, our counterparties may require us to post additional margin at any time, as a means for securing our ability to repurchase the underlying collateral during the term of the repurchase agreement. Accordingly, repurchase agreements create liquidity risk for us because if the value of the collateral underlying the repurchase agreement decreases, whether because of market conditions or because there are issuer-specific concerns with respect to the collateral, we will be required to post additional margin, which we may not readily have. If the value of the collateral were permanently impaired (for example, if the issuer of the collateral defaults on its obligations), we would be required to repurchase the collateral at the contracted-for purchase price upon the expiration of the repurchase agreement, causing us to recognize a loss. For information about these exposures and forward purchase commitments, see “—Off Balance Sheet Arrangements and Risk” and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk—Disclosures about Market Risk—Risk Management.”
 
… we may be required to raise additional regulatory capital, either in the form of equity or debt, to support our planned expansion into new business areas. In particular, we will need additional capital as we increase our risk exposure through principal trading.

As we proceed to implement our strategic plan, our liquidity needs and sources are likely to change significantly from what they historically have been.

…commencing on March 31, 2012, the amended liquidity facility also requires the Company to limit its Consolidated Leverage Ratio as at the last day of any period of four fiscal quarters to be no greater than 3 to 1…

…Certain resale and repurchase transactions involve the sale and repurchase of the underlying collateral which generally mature on the same date as the underlying collateral. These transactions are accounted for as sales and purchases and we de-recognize the related assets and liabilities from our consolidated balance sheets, and we record a forward repurchase or forward resale commitment, in accordance with the accounting standard for transfers and servicing. These transactions are generally collateralized with investment grade securities, including obligations of the U.S. government, government sponsored entities and federal agencies, and European sovereign issuers. For repurchase transactions that are accounted for as sales, we maintain the exposure to the risk of default of the issuer of the underlying collateral assets, such as the U.S. government or European sovereign issuers. The forward repurchase commitment represents the fair value of this exposure and is accounted for as a derivative. The value of the derivative is marked to market and movements in the value of the derivative may cause volatility in our financial results until the underlying collateral matures. At maturity, we are required to redeem the underlying collateral at par, which may cause us to recognize losses if the value of the collateral is less than par. If the value of the collateral at maturity is less than the repurchase price, for example due to an issuer default, we would not be able to recover the cost of the repurchase price and would incur a loss, which would adversely affect our operating results and cash flow. For a description of market and credit risks associated with these commitments see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk—Disclosures about Market Risk—Risk Management.”

…At March 31, 2011, securities purchased under agreements to resell and securities sold under agreements to repurchase of $1,495.7 million and $14,520.3 million, respectively, at contract value, were de-recognized. At March 31, 2010, securities purchased under agreements to resell and securities sold under agreements to repurchase of $1,199.8 million and $5,703.0 million, respectively, at contract value were de-recognized. See Note 3 to our consolidated financial statements for further details.

...
Our business may be materially affected by market conditions and by global and economic conditions and other factors beyond our control, including overall slowdowns in securities trading.

We generate revenues principally from commissions from execution and clearing services, principal transactions and net interest income earned on cash balances in certain of our clients’ accounts as well as interest related to our fixed income and principal transaction activities.

These revenue sources are dependent on a combination of factors beyond our control including the level of trading volumes, interest rates, credit spreads, and market liquidity. In addition, like other brokerage and financial services firms, our results of operations in the past have been, and in the future may continue to be, materially affected by many other factors (and many of which are beyond our control), including one or a combination of the following: 
 
the effect of political and economic conditions and geopolitical events, including changes in government monetary policy;
 
the effect of market conditions, particularly in the global commodities, fixed income, equity and credit markets;
 
changes in customer trading demand and speculative trading activities in the markets;
 
the financial strength of market participants;
 
the impact of current, pending and future legislation (including the Dodd-Frank Act), regulation (including capital requirements), and legal actions in the U.S. and worldwide;
 
introduction of new products or new market entrants;
 
the level and volatility of equity, fixed income and commodity prices and interest rates,
 
currency values and other market indices;
 
the availability and cost of both credit and capital both for us and our counterparties;
 
the credit ratings assigned to our unsecured short-term and long-term debt;
 
investor sentiment and confidence in the financial markets;
 
our reputation;
 
inflation, natural disasters, and acts of war or terrorism; and
 
the actions and initiatives of current and potential competitors and technological changes.

In addition, legislative, legal and regulatory developments related to our current and future businesses, are likely to increase costs, thereby affecting our results of operations. These factors also may have an impact on our ability to achieve our strategic objectives.
 
For more indepth coverage of MF Global by other bloggers, see:
Francine McKenna’s post at Forbes.com: MF Global Assets Have Left the Building: How, When, Where (McKenna is the well-known author of the Re:The Auditors blog),

Poor Accounting Frustrates MF Global Probe, by Chris Gaetano in CPABlog, published by the New York State Society of CPAs,

 
MF Global and Repo Accounting, by Anthony H. Catanach Jr. and  J. Edward Ketz, Grumpy Old Accountants Blog,

The Lesson of MF Global,
by Matt Kelly, Editor-in-Chief, Compliance Week.

Repo Accounting: After Lehman, Another Debacle was Just a Matter of Time
, Tom Selling, author of The Accounting Onion blog.

MF Global For Dummies
, by Peter L. Grant, StockTwits,
Posted: 12/13/2011 12:02:12 PM by Edith Orenstein | with 0 comments
Filed under: BNA,Denise,FASAC,FASB,FEI,Francine,Global,Hollein,Kelly,Lugo,Matt,McKenna,MF,Noski,Selling,Tom,Beresford


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Edith Orenstein