Financial Accounting Standards Board

Financial Accounting Standards Board National Association of Regulatory Utility Commissioners FASB Update May 4, 2009 Robert C. Wilkins Senior Project Manager rcwilkins@fasb.org 203-956-5236

Disclaimer The views expressed in this presentation are my own and do not represent positions of the Financial Accounting Standards Board. Official positions of the FASB Board are arrived at only after extensive due process and deliberations.

FASB Overview • Originated in 1973 • Recognized by the SEC under Section 108 of the Sarbanes-Oxley Act of 2002 • “Designated Private-Sector Standard Setter” • Recognized under Section 203 of the AICPA’s Code of Professional Conduct • Standard-setter, not a regulator • No enforcement authority

Organization of Topics • Response to Financial Crisis • Improving Financial Reporting and Simplification Efforts • International Convergence • Emission Trading Schemes

Response to Financial Crisis Establishment of Financial Crisis Advisory Group (FCAG) Roundtables Short-Term Projects Amendments to the Impairment Guidance of EITF Issue No. 99-20 Statement 133 Implementation Issue on Embedded Credit Derivatives-Synthetic CDO’s FSP to amend Statement 107’s disclosures Project on determining when a market is not active 5

Response to Financial Crisis Short-Term Projects (continued) Project on determining whether a transaction is distressed Project on other-than-temporary impairment Project on determining the fair value of alternative investments Project on disclosures about how an entity determined fair value Long-Term Project on Recognition and Measurement of Financial Instruments 6

Financial Crisis Advisory Group Objective Advise FASB and IASB about standard setting implications of (1) the global financial crisis and (2) potential changes to the global regulatory environment 7

Financial Crisis Advisory Group Areas of Study Discuss areas in which financial reporting may have created unnecessary concerns. Discuss areas in which financial reporting standards could have provided more transparency Discuss whether priorities for the FASB and IASB should be reconsidered in light of the credit crisis Discuss areas that require future attention of the Boards to avoid future market disruption 8

Financial Crisis Advisory Group Structure Co-Chairs – Harvey Goldschmid, former Commissioner of SEC and Hans Hoogervorst, Chairman of Netherlands Authority for the Financial Markets 15 senior leaders with broad experience in international financial markets and an interest in transparency of financial reporting information Public Meetings between January and June 09 – 3 in NYC and 3 in London 9

Roundtables 3 roundtables held in December 08 – one each in Norwalk, London, Tokyo Obtain input on accounting issues that require immediate attention, as well as broader financial reporting issues arising from the global financial crisis Main issues discussed were impairment, fair value option, fair value measurement, and reclassification between investment categories 10

Short-Term Projects Amendments to the Impairment Guidance of EITF Issue No. 99-20 – issued 1/12/09 (accelerated) Amendment aligns the impairment guidance in EITF 99-20 with the impairment guidance in Statement 115 Issue 99-20 relates to beneficial interests in financial assets Previously required that an other-than-temporary impairment (OTTI) be taken if the fair value of the instrument fell below cost New guidance requires that an OTTI be taken when it is probable that the holder will realize some portion of the unrealized loss on the security Effective for annual and interim periods ending after December 15, 2008 11

Short-Term Projects Proposed Statement 133 Implementation Issue on Synthetic CDO’s Clarifies that scope exception in paragraph 14B relates to the concentration of credit risk only in the form of subordination of one financial instrument to another – it’s not for single-tranche structures Other embedded credit derivative features, including those in some CDOs and synthetic CDOs, are considered embedded derivatives subject to the application of paragraphs 12, 13, and 14A Guidance delayed to provide guidance on applying paragraphs 12 and 14A, which will likely cause re-exposure. To be discussed in early June 2009 12

Short-Term Projects FSP to Amend Statement 107’s Disclosures Amendment to Statement 107 to require disclosures about the fair value of financial instruments of publicly traded companies in interim financial reports as well as annual financial reports Exposure draft issued January 30, 2009 Comment period ended March 2, 2009 13

Short-Term Projects FSP FAS 107-1 and APB 28-1—Interim Disclosures about Fair Value of Financial Instruments – issued April 9, 2009 Requires disclosures about the fair value of financial instruments whenever publicly traded company issues summarized financial information for interim reporting periods Disclose the method(s) and significant assumptions used to estimate fair value Effective for interim periods ending after June 15, 2009 (early adoption permitted) 14

Short-Term Projects Background for Project on Determining Fair Value in a Market That is Not Active On September 30, 2008, 65 members of Congress issued a letter to the SEC urging that the use of fair market accounting (or “mark-to-market”) be suspended and replaced with a form of “mark to true value.” On that same day, the SEC and FASB issued a joint press release providing clarifications about the fair value measurement guidance Proposed FSP FAS 157-d issued 10/3/08, with comments due in six days (accelerated due process) 15

Short-Term Projects FSP FAS 157-3—Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active -- Issued 10/10/08 Not all market activity represents forced liquidations or distressed sales; but also, not all observed transactions represent fair value When observable inputs are not available, acceptable to use an entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates Broker quotes might also be relevant inputs to consider Effective upon issuance, including prior periods for which financial statements have not been issued 16

Short-Term Projects Further Background The Emergency Economic Stabilization Act (signed 10/3/08) required the SEC to study mark-to-market accounting standards SEC’s Study (released 12/30/08): Majority of assets not recorded at fair value Bank Failures in 2008 caused primarily by actual loan losses and economic conditions Existing fair value and mark-to-market rules should not be suspended, but FAS 157 should be improved, especially in application 17

Short-Term Projects In response to SEC Study, two projects added to the Board’s technical agenda in February 2009 Project on Determining When a Market is Inactive The objective of the project is to provide guidance on how to properly incorporate current market liquidity in the valuation of an asset or liability Project on Determining Whether a Transaction is Distressed Focus of project is on whether the price is indicative of the price that would be received in a transaction between a willing buyer and willing seller 18

Short-Term Projects Projects Combined in FSP FAS 157-4 — Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (4/9/09) Reaffirmed that the objective of measuring fair value has always been and continues to be the same since FAS 157 was published. The objective is to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements. 19

Short-Term Projects FSP FAS 157-4 (Continued) When a formerly active market has become less so, more analysis is required to determine if the observed transactions are orderly or whether adjustments to those prices are required Factors are provided to indicate when a market may have become less active 20

Short-Term Projects FSP FAS 157-4 (Continued) Factors were provided to indicate when a transaction might not be orderly Insufficient time to market Only marketed to one party Seller at or near bankruptcy or required to sell Transaction price is outlier When evidence is that it is orderly, must heavily weight that price; when evidence is that transaction is non-orderly, must place little reliance on the observed price 21

Short-Term Projects FSP FAS 157-4 (Continued) Even if a model is used, discount rate must take into account current market conditions (uncertainty) A reporting entity’s intention to hold the asset or liability is not relevant in estimating fair value. Fair value is a market-based measurement, not an entity-specific measurement. 22

Short-Term Projects FSP FAS 157-4 (Continued) Effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively Early adoption is permitted for periods ending after March 15, 2009 (but not ending before that date) 23

Short-Term Projects Background for the Project on Other-than-Temporary (OTTI) Impairment On 3/12/09, the FASB Chairman testified at hearing of the House Subcommittee on Capital Markets, Insurance, a& Government-Sponsored Enterprises FASB pressured to get results within 3 weeks Project added and proposed FSP issued on 3/17/09 FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, issued 4/9/09 24

Short-Term Projects FASB Staff Position (FSP) FAS 115-2 and FAS 124-2 re OTTI Changes old impairment trigger from the current positive assertion of intending and being able to hold until recovery New trigger is assertion that there is both no intention to sell and, more likely than not, no requirement to sell prior to recovery If can’t meet that assertion, OTTI takes the full write-down to fair value through earnings 25

Short-Term Projects FASB Staff Position (FSP) FAS 115-2 and FAS 124-2 re OTTI (Continued) If present value of cash flows expected to be collected is less than the amortized cost basis of the security, the entire amortized cost basis of the security will not be recovered (that is, a credit loss exists), and an other-than-temporary impairment shall be considered to have occurred Discount rate – can use effective interest rate implicit in the security at the date of acquisition 26

Short-Term Projects FASB Staff Position (FSP) FAS 115-2 and FAS 124-2 re OTTI (Continued) When a credit loss exists, but entity doesn’t intend to sell and more likely than not won’t have to sell, the presentation of the OTTI is changed When other-than-temporary impairment has occurred, entity will bifurcate the charge into the portion related to credit losses and the portion due to all other factors Impairment related to credit will be reflected in earnings, while non-credit portion reflected in other comprehensive income in the equity section of the statement of financial position 27

Short-Term Projects FASB Staff Position (FSP) FAS 115-2 and FAS 124-2 re OTTI (Continued) Requires a more detailed, risk-oriented breakdown of major security types and related information currently required by Statement 115. In addition, this FSP requires that the annual disclosures in Statement 115 be made for interim periods (including the aging of securities with unrealized losses). This FSP also requires new disclosures to understand the significant inputs used in determining a credit loss, as well as a roll-forward of that amount each period Effective for interim and annual periods ending after June 15, 2009 28

Short-Term Projects Project on Recoveries of Other-than-Temporary (OTTI) Impairment The objective is to consider allowing an entity to recover, through earnings, a previously recognized other-than-temporary impairment loss on certain financial instruments when evidence exists that an impairment loss has reversed. Another objective is convergence with IFRS Under IFRS, reversals of impairment losses through earnings are allowed under certain circumstances for debt securities classified as held-to-maturity and available-for-sale. Reversals are not allowed for equity securities 29

Short-Term Projects Project on Determining the Fair Value of Alternative Investments The objective is to address practice issues relating to determining the S157 fair value for alternative investments such as hedge funds and private equity funds Project added to agenda February 2009 Staff is currently drafting a proposed FSP 30

Short-Term Projects Project on Disclosures about How an Entity Determined Fair Value The objective is to provide disclosure relating to: The details about how the fair value was determined, for example broker quotes or pricing services Sensitivities Transfers between categories Roll-forward tables for all levels, not just level 3 Project added to agenda February 2009 Staff is currently drafting materials for Board discussion 31

Long-Term Project Joint Project on Improvements to Recognition and Measurement of Financial Instruments Reconsideration of the measurement attributes for financial instruments Project added to agenda December 2008 Kick-off meeting on March 24, 2009 to discuss: Objectives of project Development of criteria or characteristics to be used for determining a measurement attribute other than fair value if it is decided that a measurement attributes other than fair value should be applied to certain financial instruments 32

“CIFiR”: SEC Committee to examine the U.S. financial reporting system Goals: reduce unnecessary complexity and make information more useful and understandable for investors. Issues that will be considered include: Restatements, materiality, industry-specific guidance, options in accounting, rules-based (interpretive) guidance from FASB and SEC, due process, cost-benefit, etc. Final report issued August ’08 More info on www.SEC.gov SEC Advisory Committee on Improving Financial Reporting 33

SEC Advisory Committee on Improving Financial Reporting Provided recommendations for improving standard-setting activities One of the more significant, yet least observed recommendations is that standard setting should give pre-eminence to the investor’s perspective Supported the codification of all authoritative accounting literature into one document

Simplification Efforts FASB Accounting Standards Codification™ Integrates thousands of accounting pronouncements issued by FASB, AICPA, EITF, and SEC and organizes by topic. Will become the single source of authoritative U.S. GAAP, and will supersede existing standards (but not change their meaning). Will coordinate with XBRL taxonomies. Will naturally highlight complex areas: consider what should be simplified in future Issued for 1-year public “verification” in 1Q ’08 Expected to become live July ’09 35

Sources of Information The FASB website www.fasb.org – Project updates – Effective dates – Issued FSPs – Exposure drafts – EITF material – Original Final Statements Sign up for a weekly e-mail from the FASB (under Action Alert on left side of home page). 37

International Convergence Goal is a consistent set of high quality standards for use in global capital markets Working with IASB, SEC and others on how to achieve that goal SEC Release (elimination of reconciliation to US GAAP for foreign filers – effective March 2008) SEC Concept Release (should SEC allow US cos. to choose between US GAAP & IFRS?) 39

Relationship with IASBMajor Joint Projects Memorandum of Understanding Acquisition Method and Noncontrolling Interests (FAS 141R and FAS 160 issued in December ’07; effective years beginning after 12/15/08) Conceptual Framework (eight phases) Financial Statement Presentation (Discussion Paper in 3Q ’08) Revenue Recognition (PV 4Q ‘08) 40

Relationship with IASBMajor Joint Projects Leasing (working on a “rights and obligations” model, PV 1Q ‘09) Financial Instruments - Recognition and Measurement Insurance Fair Value Measurement (FASB leading, Statement 157 issued 9’06 – IASB issued as a PV in ‘07; currently redeliberating) Liabilities and Equity (FASB leading, PV in 4Q ‘07) 41

Emission Trading Schemes • On February 21, 2007, the Board added a project to its agenda to provide comprehensive guidance for participants in emission trading programs • Project will provide guidance for emission allowances as well as liability recognition and measurement as a result of an entity emitting pollutants

Emission Trading Schemes • Emission Trading Schemes project delayed due to project on valuation of commodity inventory • Proposed FSP ARB 43-a, Amendment of the Inventory Provisions of Chapter 4 of ARB No. 43, was released for comment on May 1, 2008. • Project on valuation of commodity inventory dropped from Board’s agenda in January 2009.

Emission Trading Schemes • Both the IASB and the FASB are pursuing this issue as a joint project referred to as Emissions Trading Schemes. • Project temporarily on hold while some “liability” issues in the Conceptual Framework joint project get resolved • Board meeting likely sometime this summer or early fall

Questions? Fair Value Financial Crisis Emission Allowance OTTI Int’l Convergence Statement 140

Financial Accounting Standards Board