BANKING
Federal financial regulators issued a final Statement on Subprime Mortgage Lending, which addresses concerns about adjustable-rate mortgages (ARMs) and the payment shock they can carry. The statement was issued by the Federal Reserve Board, FDIC, Office of Thrift Supervision, Office of the Comptroller of the Currency, and the National Credit Union Administration.

The statement describes prudent safety, soundness and consumer protection standards that lending institutions should follow to ensure borrowers obtain loans they can afford to repay.

The standards also restrict situations in which lenders may accept less documentation of borrowers’ income. The standards also require clear disclosures and impose limits on prepayment penalties.

The interagency statement is available at www.fdic.gov/news/news/press/2007/pr07055a.html.

In a bid to help customers make informed decisions when shopping for home loans, the Federal Reserve Board has established an online Mortgage Comparison Calculator. The tool allows consumers to compare mortgage payments and rate of equity accumulation for up to six types of fixed and adjustable-rate mortgages.

Based on information provided by the user, the calculator determines loan balances in future years, home equity in future years, initial monthly payment, future monthly payments with no interest rate change, and future monthly payments with an interest rate change. The calculator is available at www.federalreserve.gov/apps/mortcalc/.

An FDIC report says offering Individual Development Accounts (IDAs) is a promising way to attract banking business from low- and moderate-income households. IDAs are matched savings accounts that help a household save toward a particular goal such as a home purchase, college education or a small business expansion.

The FDIC estimates that 10 million American households of low or moderate incomes hold assets and conduct regular financial transactions with nonbank financial companies. Many of these people make little or no use of banking services. The volume of nonbank financial transactions is estimated to be as much as $250 billion.

Approximately 244 FDIC-insured institutions participate in IDA programs. Among other benefits, participating institutions receive positive consideration during Community Reinvestment Act examinations.

The report is available in the publication FDIC Quarterly at www.fdic.gov.

FINANCIAL REPORTING
SEC Chairman Christopher Cox announced the establishment of an advisory committee that will examine the U.S. financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors.

The SEC Advisory Committee on Improvements to Financial Reporting will study the causes of complexity and recommend to the SEC how to make financial reports clearer and more beneficial to investors, reduce costs and unnecessary burdens for preparers and better utilize advances in technology to enhance all aspects of financial reporting. The committee will be chaired by Robert C. Pozen, chairman of MFS Investment Management in Boston and former vice chairman of Fidelity Investments, and will include between 13 and 17 additional members with various backgrounds to be named by the SEC in the near future.

The SEC, following its proposal to eliminate the reconciliation requirement for foreign companies filing their financial statements using International Financial Reporting Standards (IFRS), also published a report about the application of IFRS based on staff reviews of annual reports from more than 100 foreign companies that reported in IFRS for the first time. To view the report and SEC staff correspondence with the companies reviewed, visit www.sec.gov/divisions/corpfin/ifrs_staffobservations.htm and www.sec.gov/divisions/ corpfin/ifrs_reviews.htm, respectively.

The Private Company Financial Reporting Committee recommended that FASB extend the effective date and make other changes to proposed FASB Staff Position no. FAS 154-a, Considering the Effects of Prior-Year Misstatements When Quantifying Misstatements in Current-Year Financial Statements .

In a letter to FASB Chairman Robert Herz, PCFRC Chairwoman Judith O’Dell recommended that the proposed FSP take effect for private company annual financial statements issued for fiscal years ending after Dec. 15, 2007. The current FSP is effective for financial statements issued for fiscal years ending after June 15, 2007. O’Dell said the delay will give statement preparers and practitioners time to become familiar with the requirements.

O’Dell also recommended removing references in the FSP to SEC Staff Accounting Bulletin No. 99, Materiality , and suggested FASB require disclosures related to the cumulative effect adjustment to include reconciliation between the previously reported opening balance and the restated opening balance. The recommendations are available at www.pcfr.org/downloads/PCFRC_Recommendations-FSP_154.pdf .

FASB is forming a resource group to provide the board input on potential clarifying guidance concerning the application of FASB Statement no. 157, Fair Value Measurements, to fair value information required or permitted under U.S. GAAP. The group’s first priority will be to help the board evaluate any known implementation issues related to 157.

FRAUD
Weakening operating performance was a common characteristic among companies alleged to have manipulated financial statements, according to an analysis of SEC enforcement releases. Researchers led by Patricia Dechow, an accounting professor at the University of California, Berkeley’s Haas School of Business, examined more than 2,000 releases from 1982–2005. That review resulted in a sample of 680 companies alleged to have manipulated financial statements. Other common characteristics of companies in the sample included unusually high growth in cash sales combined with declines in cash profit margins and earnings growth; declines in order backlog and employee headcount; and abnormally high increases in financing and related off-balance sheet activities such as operating leases.

The Financial Crimes Enforcement Network (FinCEN) released a new report that breaks down the geographical dispersion of Suspicious Activity Report (SAR) filings by financial institutions between April 1, 1996, and Dec. 31, 2006. The report, SAR Activity Review—By the Numbers , showed the rate of increase of SAR filings by depositary institutions dropped from 37% for 2004–2005 to 9% for 2005–2006. Money laundering (48.3%) and check fraud (10.7%) constituted the majority of Bank Secrecy Act filings. Just over half of all filings over the 10-year period occurred in California (24%), New York (11.1%), Texas (6.3%), Florida (5.7%) and Illinois (3.5%).

The report, with all related statistical charts and a companion report, The SAR Activity Report—Trends, Tips & Issues, is available at www.fincen.gov/news_release_sar_btn8.html .

GOVERNMENT ACCOUNTING
GASB issued Concepts Statement no. 4, Elements of Financial Statements, which defines the basic elements of state and local financial statements. Integral to the definitions is the concept of a resource as an item with a present capacity to provide service. The statement defines the elements of statements of financial position as:

  Assets —resources with present service capacity that the government presently controls.

   Liabilities —present obligations to sacrifice resources that the government has little or no discretion to avoid.

   Deferred outflow of resources —a consumption of net assets by the government that is applicable to a future reporting period.

   Deferred inflow of resources —an acquisition of net assets by the government that is applicable to a future reporting period.

   Net position —the residual of all other elements presented in a statement of financial position.

An increase in the number and dollar amounts of governmental derivative contracts has led GASB to propose new reporting standards for state and local governments. GASB said the ED, Accounting and Financial Reporting for Derivative Instruments, would make derivatives transactions more transparent to the public by requiring that the fair values of all derivatives be reported as assets or liabilities in financial statements.

“Governments engage in derivatives transactions primarily to minimize identified financial risks they face, but those derivatives may themselves expose governments to other risks,” GASB Chairman Robert Attmore said in a statement. “To understand the inherent risks that derivatives pose to the financial health of governments, the public needs the improved information this proposal would require.”

The ED and a plain-language supplement that summarizes the proposed standards are available at www.gasb.org. Comments are requested by Oct. 26.

INTERNATIONAL
The International Financial Reporting Interpretations Committee (IFRIC), the interpretive body of the International Accounting Standards Board (IASB), issued Interpretation no. 14 (IFRIC 14), The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction, on International Accounting Standard no. 19 (IAS 19), Employee Benefits.

IFRIC 14 provides general guidance on how to assess the limit in IAS 19 on the amount of the surplus that can be recognized as an asset. It also explains how the pension asset or liability may be affected when there is a statutory or contractual minimum funding requirement. No additional liability will be recognized by the employer under IFRIC 14 unless the contributions that are payable under the minimum funding requirement cannot be returned to the company.

The interpretation is mandatory for annual periods beginning on or after Jan.1, 2008. Earlier application is permitted. For more information visit www.iasb.org .

SMALL BUSINESS
Maine Gov. John Baldacci has signed into law small business regulatory flexibility provisions. The law directs regulating agencies to consider the economic impact of proposed regulations on small businesses in the state and to describe less burdensome alternatives that accomplish the agency’s goal. The law also requires agencies to make this information available for public review before the public hearing on a regulation. If the economic analysis is not conducted, the rule may not go into effect. According to the U.S. Small Business Administration’s Office of Advocacy statistics for 2005, 97.5% of Maine businesses were small businesses that employed 61.2% of the state’s private work force. More information is available at the Office of Advocacy Web site at www.sba.gov/advo.

FYI
The PCAOB named C. Gregory Scates as deputy chief auditor. Scates, previously the organization’s associate chief auditor, joined the PCAOB in June 2003. Scates’ new role will include providing technical direction in the development of the board’s standards and ensuring clear communication of PCAOB standards to public company auditors and others.