BANKING
The FDIC reported that profits at commercial banks and savings institutions declined 3.4% from year-earlier levels in the second quarter of 2007, dragged down by higher expenses for bad loans and narrower net interest income. The sector’s net income in the quarter was $36.7 billion.

Loan-loss provisions totaled $11.4 billion in the quarter, a 75.3% increase from the year-ago period. The value of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) grew 10.6% from the previous quarter, the fifth consecutive quarterly increase. The noncurrent loan rate was 0.90% at the end of the quarter, an increase from 0.70% in the second quarter of 2006.

On the positive side, commercial and industrial loans grew by a record $51.3 billion (4.1%) in the quarter. Loans to small businesses increased at an annual rate of 9.6%, a sharp increase from the 3.5% growth for the 2005–2006 period.

The complete report is available in the Quarterly Banking Profile at www2.fdic.gov/qbp/index.asp.

Federal financial regulators and the Conference of State Bank Supervisors (CSBS) issued a statement encouraging federally regulated and state-supervised financial institutions to identify residential mortgage borrowers at risk for default and pursue loss mitigation strategies that preserve homeownership.

The statement notes that a significant number of hybrid adjustable-rate mortgages will reset throughout the remainder of the year. Many subprime and other mortgage loans have been transferred into securitization trusts governed by pooling and servicing agreements that may provide servicers with the flexibility to contact borrowers ahead of loan resets, especially in cases where default is reasonably foreseeable.

The statement was issued jointly by the Federal Reserve, FDIC, Office of the Comptroller of the Currency, Office of Thrift Supervision, National Credit Union Administration and the CSBS. The Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages is available at www.fdic.gov/news/news/press/2007/pr07073a.html.

In a separate release, the FDIC, CSBS and American Association of Residential Mortgage Regulators cautioned institutions against allowing debt-to-income (DTI) ratios above 50% in applying loss mitigation strategies. Loss mitigation strategies should create long-term stability for borrowers, investors and the marketplace, the agencies said. DTI ratios above 50% increase the future likelihood of delinquencies and defaults.

FINANCIAL REPORTING
Sen. Charles Schumer, D-N.Y., called on the leaders of the Big Four to ensure that their clients are aware of SEC and FASB guidance on Statement no. 140 relating to modifications of subprime loans at risk of default.

In a letter to Barry Salzberg of Deloitte & Touche USA LLP, James Turley of Ernst & Young LLP, Timothy Flynn of KPMG LLP and Dennis Nally of PricewaterhouseCoopers LLP, Schumer wrote that one potential obstacle to refinancing or modifying at-risk subprime loans is a concern that such a move might require companies to stop using off-balance-sheet treatment for their securitized mortgage assets, putting them at risk of violating capital and other requirements. FASB and the SEC have concluded that off-balance-sheet treatment could continue in such cases.

Schumer, a member of the Senate banking and finance committees, called on the Big Four leaders to inform their clients of the guidance. “I am concerned that many of the investors holding securitized mortgage assets are continuing to cite FAS 140 as a reason to avoid loan modifications and refinancings,” he wrote.

INTERNATIONAL
Marking completion of the first phase of the International Accounting Standards Board’s (IASB’s) joint initiative with FASB to review and harmonize the presentation of financial statements, the IASB issued a revised version of International Accounting Standard (IAS) no. 1, Presentation of Financial Statements. The revision is aimed at improving users’ ability to analyze and compare information in financial statements.

The project’s second phase, which has already begun, is examining more fundamental questions about the presentation of information in financial statements. The IASB expects to publish a discussion paper on the subject within the next six months.

The current changes require information in financial statements to be aggregated on the basis of shared characteristics and to introduce a statement of comprehensive income. The revised standard gives preparers the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two statements. The revisions include changes in the titles of some of the financial statements to reflect their function more clearly. The new titles will be used in accounting standards, but are not mandatory for use in financial statements.

The revised standard is effective for the annual periods beginning on or after Jan. 1, 2009. Early adoption is permitted. To purchase the revised standard, visit www.iasb.org.

The IASB also published an exposure draft of proposed amendments to IAS 39, Financial Instruments: Recognition and Measurement. The amendments are intended to clarify what can be designated as a hedged item in a hedge accounting relationship.

The ED specifies the risks that qualify for designation as hedged risks when an entity hedges its exposure to a financial instrument. It also clarifies when an entity may designate a portion of the cash flows of a financial instrument as a hedged item.

The proposals respond to requests for additional guidance on what IAS 39 permits to be designated as a hedged item. Although the IASB is undertaking research that will ultimately lead to the replacement of IAS 39, that work is at an early stage. The IASB therefore decided to propose the amendments contained in the ED.

MONEY LAUNDERING
The revised Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual is available at the Federal Financial Institutions Examination Council home page. The latest version updates guidance on risk-based policies, procedures and processes for banking organizations to comply with the BSA and safeguard operations from money laundering and terrorist financing.

The Federal Reserve Board, FDIC, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, and the CSBS worked on the revisions with the Financial Crimes Enforcement Network, the federal agency responsible for administering the BSA.

The manual can be downloaded at www.ffiec.gov/bsa_aml_infobase/default.htm.

PEER REVIEW
The AICPA released a Peer Review Practitioner’s Tool Kit as part of an initiative to enhance the Peer Review Program. The Tool Kit provides talking points to help practitioners gain support for developing a peer review practice, a pipeline tool for tracking and following up with potential prospects and other tools and information practitioners can use to promote their peer review services and develop their practice.

The kit is available at www.aicpa.org/members/div/practmon/practitioners_toolkit.asp.

PROFESSIONAL ISSUES
Illinois enacted mobility legislation that will make it easier for out-of-state CPAs to serve clients. The new law includes the following provisions:

Out-of-state CPAs holding a valid CPA license in another state will not need to obtain an Illinois license, registration or temporary practice permit to practice public accounting in Illinois or hold themselves out as a CPA in Illinois.

Out-of-state CPAs exercising the practice privilege above agree to comply with the Illinois Public Accounting Act and be subject to the disciplinary jurisdiction of the Illinois Department of Financial & Professional Regulation.

Any CPA firm that does not have an office in Illinois but performs audit services for an Illinois-based entity must hold a valid Illinois public accounting firm license.

The AICPA Accounting and Review Services Committee issued a proposed Statement on Standards for Accounting and Review Services titled Defining Professional Requirements in Statements on Standards for Accounting and Review Services.

The ARSC believes that by defining, in a fashion similar to SAS no. 102, the levels of responsibilities that accountants have in compilation and review engagements, standards for those engagements will be clarified and consistent with the standards for audit engagements.

The proposed SSARS defines two categories of professional requirements: unconditional requirements, indicated by the words “must” or “is required”; and presumptively mandatory requirements, indicated by the word “should.”

The proposed SSARS, if issued as a final standard, would be effective upon issuance. The proposal is available at www.aicpa.org/download/exposure/Defining_Prof_Req.pdf.

XBRL
The SEC announced that several mutual funds have begun providing risk and return information using interactive data, a significant step in the SEC’s ongoing efforts to make financial data more useful and understandable for investors. All of the new, interactive mutual fund data will be made available to the public on the SEC’s EDGAR database and to subscribers of EDGAR’s high-speed data dissemination service. The SEC will monitor how the data can be used to provide information to mutual fund investors and will consider whether further steps are necessary to increase accessibility. Among the first mutual fund filers to participate in the expanded voluntary program are the Allegiant Advantage Fund, American Funds’ Europacific Growth Fund, Muhlenkamp Fund, and Vanguard 500 Index Fund.

FYI
The SEC’s Office of the Chief Accountant has selected three professional accounting fellows for two-year terms beginning this fall:

Adam Brown, CPA, currently a senior manager in BDO Seidman’s National SEC Department based in Dallas.

Robert G. Fox III, CPA, currently a senior manager in Grant Thornton’s Professional Standards Group based in Charlotte, N.C.

Brett A. Williams, CPA, currently a senior manager in Pricewater-houseCoopers’ National Office based in Florham Park, N.J.

The newly selected professional accounting fellows will be involved in efforts to improve the current system of financial reporting, development of rule proposals under the federal securities laws, acting as liaisons to the professional accounting and auditing standard-setting bodies, and consulting with registrants on accounting and reporting matters