The Standards Challenge

Practical tips on implementing accounting policy at financial institutions.

CPAs WHO IMPLEMENT ACCOUNTING STANDARDS at corporations are responsible for promoting the company’s accounting health and ensuring that management understands the impact of new regulations.

THE FIRST CHALLENGE FOR ANY ACCOUNTING policy director is managing the sheer volume of output the regulators produce. The body of literature is ever growing, often complex in its subject matter, increasingly complicated by cross-references and historical notes and highly specific.

IMPLEMENTING ACCOUNTING POLICY at a financial institution requires the leadership of a well-rounded finance professional who understands both the business and the accounting pronouncements. An important goal for a CPA in this position is to assess what each standard requires as early as possible and stay ahead.

PARTICIPATION ON INDUSTRY COMMITTEES and task forces gives company representatives the opportunity not only to share information and concerns but to unite in an industry presentation to the regulators when appropriate.

CPA INTERACTION WITH THE STANDARD SETTERS can be an opportunity to voice concerns and have an impact on a standard’s outcome.

JEANNE RESCIGNO is a freelance writer in New York City. Her e-mail address is .

PAs who implement accounting standards at corporations are responsible for promoting the company’s accounting health and ensuring that management understands the impact of new regulations. Implementing new accounting standards can be difficult at even the smallest companies. But a tough job just gets tougher at a global company with many different operating segments. Regulators often look to such an organization to help establish an industry position on an accounting standard. Esther Mills, CPA, describes her challenging job as director of accounting policy at Merrill Lynch & Co.

The FASB Record

Since its creation in 1973, FASB has issued 143 statements, not including special reports and interpretations.

Source: FASB, Norwalk, Connecticut.


Mills’ job consists of two interrelated functions, internal and external, each receiving about half her time and energies. The accounting standard setters, FASB, the SEC, the AICPA and, at times, other organizations such as the stock exchanges, drive both components for Mills.

The first challenge for any accounting policy director is managing the sheer volume of output the regulators produce. The body of literature is ever growing, often complex in its subject matter, highly specific and increasingly complicated by cross-references and historical notes. Sometimes policy directors even find it can be a handicap to miss an important speech delivered at a conference.

Implementing accounting policy at a financial institution requires a well-rounded finance professional who understands both the business and the accounting pronouncements, no matter the size of the company. An important goal for a CPA in this position is to assess what each standard requires as early as possible and stay ahead. One way Mills does that is by identifying who in the sprawling company needs to give or get input.

Mills navigates the parallel aspects of her job with the help of a staff of four accountants, all CPAs with 10 to 20 years of public and private experience. Some of Mills’ team spends more time on internal consultation with the business units, but she tries to make sure everyone participates to a certain extent in external activities such as the industry meetings.

There is also a three-person accounting policy group in London which reports to both Mills and Joseph Regan, the European controller. The chartered accountants in London keep watch over a variety of Merrill Lynch entities—including a major broker– dealer—that file separate financial statements under UK GAAP. They also review and provide accounting guidance on numerous complex transactions originating in London and continental Europe and respond to proposals of the UK Accounting Standards Board.

The two accounting policy groups conduct an employee exchange program in order to ensure cross-training in the types of business in each location and the key accounting issues that arise. Mills describes this program as very successful in improving teamwork and communications.

The first step in a new project is brainstorming among the accounting policy staff. Then the group reaches out to the business groups for their thoughts and input about who else needs to be in the loop. Of necessity, each staff member has specialties, but Mills also encourages cross-training.

Firm-wide education is a big part of the job. Mills and her staff prepare presentations for the groups they have identified and scale those presentations up or down as needed. Mills finds that small group sessions, where there can be much discussion tailored to specific businesses, tend to work best, even though that may mean doing a lot more sessions.


From her assessment of each new rule or proposal and its impact on her employer, Mills plans her internal and external strategies. She always agrees on deliverables with the relevant business groups, but depending on the size and the scope of the project, may or may not formalize this in writing. Generally her group prepares the final memo regarding implementation, with input from the business unit.

Just explaining the requirements can be fairly involved. Initially, Mills’ group provides a high-level explanation, with basic concepts and areas that will be affected. Then as the CPAs and business units drill down to the next level, additional questions arise. Where specific answers are not spelled out in the standard itself, Mills and her group will then interpret the standard. (see “Translating the Standards,” JofA, June99, page 29 .)

The recent implementation of Statement no. 133, Accounting for Derivative Instruments and Hedging Activities, illustrates how this works. This standard had the most impact on the treasury group, which issues all of Merrill’s debt. Mills met weekly with the treasury department and its accounting support to develop a project plan and then discuss the relevant issues. As it happened, this group was implementing new computer systems at the time, so Mills was able to integrate the new standard’s requirements into the unit’s technology plans as follows: the system used to track the company’s debt needed to track the identification numbers for a swap hedging the debt so the debt system could interface with the swap valuation system automatically and generate the accounting entries required under Statement no. 133. (For more on this topic, see “Practical Issues in Implementing FASB 133,” JofA, Mar.01, page 26. )

For a global business, implementing U.S. standards may involve the foreign offices, but the nature of the interaction is the same as with units back home. “The challenge for us is to understand the different type of issuance or a different concentration of the business,” she says, “and then explain which aspects of accounting standards will have an impact.”

In Tokyo, the company tends to do more debt issuances with complex interest rate features, as part of a structured note program, and those are subject to special rules in Statement no. 133. So Mills needed to focus more on this area for the Tokyo office.


The external part of Mills’ job—maintaining a liaison with the standards setters—is the other half of her role. She wants to make sure those who issue the standards understand the real-world business and industry context in which they will be implemented. “Since they are not dealing with these products and services on a day-to-day basis, it can be helpful for the regulators to hear how they work,” Mills says.

Educating the standard setters may be as straightforward as translating industry jargon into generic accounting terms. The securities industry abounds with product acronyms and highly specialized transactions. A repo, or repurchase agreement, for example, is one in which a firm lends a security to another and receives cash while simultaneously agreeing to repurchase the security at a future date. It is recorded as a liability on the balance sheet. Resales are the exact opposite transaction and are also referred to as “reverse repurchase agreements.” It is easy for newcomers to get confused as to which side of the transaction, and which side of the balance sheet, is under discussion. Occasionally, other sectors of the financial services industry use the same words with different meanings, adding to the confusion.

During a proposal’s comment period Mills routinely pulls together and writes the corporation’s formal response. Coming to a firm-wide opinion to be delivered on Merrill Lynch letterhead can be a challenge for her. Before she can respond, she solicits the input of her constitutents, such as the specialists in risk management, treasury, tax, the legal department and operations. Internal audit is always in the loop. Most accounting changes will affect computer systems sooner or later, so systems personnel have a seat at the table.

After she drafts a response, everyone she or her staff has met with gets a chance to review it and clarify any issues. Mills finds it best to get input and approval from senior management early to avoid last-minute changes. For example, there was a proposal issued this year by the joint working group of standard setters on fair value accounting that was about 300 pages long, not something senior executives have the time to read and digest. So Mills’ first step was to identify what the key issues were and discuss with senior management what Merrill Lynch’s planned response would be.


“The financial services industry is enormously complex and has received a lot of attention from the standard setters in the past few years,” Mills says. Participation in industry associations enhances Mills’ ability to offer Merrill Lynch’s cooperation and to be pro-active with the standard setters. She chairs the accounting policy committee of the Bond Marketing Association and serves on the dealer accounting committee of the Securities Industry Association (SIA) and on two AICPA groups: the blockage factor and the stockbrokerage and investment banking regulatory liaison task forces. This participation gives Mills—and her counterparts at other companies—the opportunity not only to share information and concerns but also to unite in an industry presentation to the regulators when appropriate. This joint effort can inform the standard setters that issues are not unique to one company or just the largest ones but important to financial institutions overall. (see “Same Concerns at Smaller Institutions,” at the end of this article.)

Take, for instance, FASB Statement no. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The original FASB proposal called for showing the gross notional value of collateral that is in the possession or control of secured parties on the balance sheets of those secured parties. The Bond Market Association’s accounting policy committee suggested, instead, measuring the value of the right to use collateral. Although FASB had considered this alternative, it had not proposed the idea for reasons of practicability. The six firms on the committee offered to test their counter-proposal because they believed it had merit. Mills and the committee members spent the next few months asking their own accounting and business personnel how to implement the proposal. They also pulled data for a sample period to determine the impact on the firms’ financial statements. The six firms then made a presentation to FASB that reported implementation was possible, but the numbers obtained were so immaterial, it didn’t seem worth doing.

Ultimately, Statement no.140 contained neither what FASB had originally proposed nor the Bond Market Association’s counter-proposal. Rather, secured parties must include the notional, or contract, value of collateral that is available for their use, but only in the notes to their financial statements.


Mills also lays groundwork within her company for whatever may be coming from the regulators. “Let’s figure it out now,” she advises the various affected business units, “since we might need to do this for real in six or nine months.”

The long gestation period of FASB Statement no. 141, Accounting for Business Combinations, and Statement no. 142, Accounting for Goodwill and Intangible Assets, provided an opportunity for Mills to leverage the internal and external aspects of her job.

FASB considered accounting for business combinations and the treatment of goodwill and other intangibles, starting in 1996, and issued its ED in September 1999. In the following year, while at Goldman Sachs, Mills made her first presentation to FASB on the subject and later continued that dialogue on behalf of Merrill Lynch. FASB’s proposal, which eventually resulted in the new standard’s eliminating pooling and goodwill amortization in Statement nos. 141 and 142, sounded good to many, including Merrill. (for more on this subject, see “Say Good-Bye to Pooling and Goodwill Amortization” JofA, Sept.01, page 31. )

While Mills conducted the external dialogue, she also met with the Merrill Lynch strategic planning personnel who research and recommend business combinations for the company itself. “How would we implement this together?” she asked. “What kinds of things would you be looking at and measuring and how?”

During the proposal’s comment period, a team of FASB staff and board members conducted confidential field visits with corporate America. Accompanied by the company controller, Mills participated in those visits, which were aimed at uncovering the same kind of information she was collecting internally. FASB had genuine concerns about practicability for its constituents and arrived at each meeting with a long list of questions about how the standard would be implemented, which reporting units would be affected and what exactly was currently on a company’s balance sheet.

The next major project Mills is gearing-up for is one that will have an impact on a number of accounting rules: fair value, the requirement to value all financial instruments on a market value basis. For companies other than those already using this accounting methodology, FASB’s project will “dramatically change the historical cost model of accounting,” says John Fosina, CPA, first vice-president and legal and regulatory controller and Mills’ boss. Given that financial instruments are the stock in trade for financial institutions, they use fair value accounting on their balance sheets and have much to contribute to the project’s outcome. Still, there are “pockets” where Merrill Lynch does not use fair value accounting, or “mark-to-market.” For example, structured liabilities are notes issued by Merrill Lynch on behalf of a client, which will incorporate whatever risk exposure the client desires. Though these notes are issued in the form of Merrill debt, their primary purpose is not to raise money for the company but to tailor a product to a client’s specific needs. Because of the intricacies of the accounting for these notes, Merrill is not always permitted to mark these instruments to market in their entirety. The SIA committee Mills serves on believes that in these situations it would be more appropriate to record the entire instrument at fair value and has made that recommendation.


Implementing accounting policy is more than reacting to new rules or trying to influence rule making. The ongoing businesses of Merrill Lynch would require accounting guidance even if the rule makers shut down.

Merrill has a standing new product review committee on which Mills serves with the same specialists she may contact when she is investigating new standards. A new product or “structured transaction” (a trade that has been tailored for a particular customer and may not be exactly like any other) gets examined from all relevant perspectives early in the process. Traders and investment bankers are routinely tailoring transactions for corporate and institutional customers. Such structured transactions involve cash assets (stocks and bonds) plus related derivative instruments. The players in a structured transaction are Merrill Lynch, the client and, often, trusts and special- purpose corporations.

A common structured transaction is a securitization of an asset such as credit card receivables. The client will securitize the assets using a special-purpose trust and retain a residual interest in the trust. If the transaction is not designed appropriately, however, the trust or assets could wind up having to be recorded on the financial institution’s balance sheet. This is an undesirable outcome for a number of reasons, not least because the transaction would then require the financial institution to put up capital against it. But if the transaction is designed properly from an accounting perspective, all of this can be avoided. That’s where Mills and her team come in.

Mills encourages businesspeople who, after all, are very concerned with the accounting and tax needs of their clients, to approach her on an ad hoc basis. The rules can be hard to summarize, especially for those who have not followed the development of the standards and may not have any accounting background. In putting together a highly complex and customized transaction, a trader may be focused on the client. But Mills has to be sure a product has no unintended consequences on Merrill Lynch’s financial statements.


Mills’ major challenge is making sure that she is on top of how the accounting standards are working and that she has reached out to everyone she needs to. Her reward is job satisfaction. Constant innovation in a dynamic industry is something Mills loves about her job. She mentions how the traders and other businesspeople she works with come up with something new, it seems, every day. “You get to see products on the ground floor. You are challenged on a daily basis, not just to be on top of accounting principles but to put them into practice.”

Often a new standard helps an accounting policy director to protect the corporation. Are there too many standards? “People complain about increasingly complex standards. But we have increasingly complex products,” Mills says. Multiple agencies run the risk of contradicting each other, at least occasionally and at least during the comment period. “It is one of the things we watch out for,” Mills admits. And things could change tomorrow. “I think it’s harder if you are not following the literature as it develops,” she says.

Mills encourages those with the necessary resources to participate and make their concerns known. Indeed, CPA interaction with the standard setters can be an opportunity to have an impact on a standard’s outcome.

Same Concerns at a Smaller Institution
N ot everyone responsible for implementing accounting policy and standards at a financial services institution has the resources of a very large global corporation with a department dedicated solely to that purpose. A more typical experience for corporate CPAs and financial executives occurs at PFF Bancorp, Inc. located in Pomona, California.

Publicly traded PFF Bancorp owns 100% of PFF Bank & Trust, a national savings bank with nearly $3 billion in assets and 24 retail banking branches in Southern California. The bank, a successor to a savings and loan association that first opened its doors in 1892, is in transition from a traditional thrift to a community bank. Gregory C. Talbott, CPA and CFO, operates an accounting and finance division with 20 people, including the controller and the vice-president of finance.

Talbott is responsible for implementing accounting standards at PFF. “As the principal accounting officer, it’s my signature on the 10-Q and the 10-K,” he notes. So he, just like Esther Mills at Merrill Lynch, must review all pronouncements and standards in order to get his arms around them, even though they will not all be equally relevant to the smaller PFF.

For example, he spent considerable personal energy, over some years, assessing the evolving nature of FASB Statement no.133, Accounting for Derivative Instruments and Hedging Activities, as well as his own expertise with hedging. “Nobody understood quite what it was when it first came out. I didn’t know whether the standard would have much application to us until the last chapter was written,” Talbott notes. He read FASB’s output and commentary, and attended meetings and seminars to keep up. Ultimately, though, the impact on PFF was limited.

But Statement no. 115, Accounting for Investment Securities, was something PFF needed to understand, and Talbott was responsible for seeing that it did. The first step, assessing whether and to what extent the standard was relevant to PFF, was fairly simple for its CFO because the bank had nearly 30% of its assets in marketable investment securities—a sizeable stake for the institution.

While staying on top of new rules and proposals may look pretty similar for financial institutions of all sizes, implementation can look quite different. For Talbott, implementation of change can mean up-close and personal. For example, since Statement no. 115 required the bank to make a distinction between securities that were available for sale and those held to maturity, Talbott personally sat down with his controller and assistant controller to identify and categorize all of the bank’s security positions. Similarly, he was directly involved in addressing how to make the new policy operational—setting up the systems needed to capture market value on a monthly basis and creating a new general ledger account for unrealized gains and losses.

PFF relies on its independent auditor, KPMG, with respect to the internal implementation of accounting standards. “We ask the auditors to review what we have done to ensure that we have implemented properly,” says Talbott. This may include running policies past the auditors when they are specifically written to implement a new standard. But, mainly, KPMG alerts Talbott to any shortcomings through its quarterly review of financial statements and the auditors’ understanding of the underlying business and its accounting.

Talbott spends about 10% of his time serving on industry and professional task forces and committees. He participates on the Financial Institutions Accounting Committee (FIAC), a group of 16 thrift industry senior executives, sponsored by the Financial Managers Society, a Chicago-based trade association of thrifts and commercial banks. Though this is a far smaller proportion of PFF’s time than a much larger company can invest, Talbott is enthusiastic about the leverage he gets from participating with these groups.

First, the primary role of FIAC is to communicate with the regulators and accounting standards setters regarding issues of concern to the industry. To that end, FIAC meets annually with FASB and, several times a year, with the SEC and other federal regulators. For Talbott, FIAC’s meetings serve as his principal forum for communicating with and responding to regulators and accounting standards setters. This is “very much a two-way street” he says. “They want to know what’s on our minds and we want to get their views.”

Second, according to Talbott, there is a similar reciprocity and leverage within FIAC. Without a large staff of accounting experts at his disposal daily, Talbott finds listening to the input of his peers on FIAC to be invaluable. He further finds that participation in FIAC prompts him to keep current so he can be a valued contributor himself. “It’s a kind of forced discipline,” says Talbott.

In the end, the regulators and standards setters contribute to accomplishing the job at PFF. But do the costs of the rule-making machine outweigh the benefits? “We do have a tremendous number of accounting standards that have gotten extremely specific. But I believe that is necessary,” says Talbott. He responds thus to criticism of the accounting standards setters for their steady stream of output for two related reasons. “In all industries—but especially the financial services industry—things have become increasingly complex. I don’t believe we have any alternative but to have the number and scope of pronouncements that we have.”

Talbott says as the creativity and variability of business practices evolves it is important to have consistency among companies. “The primary role of accounting and financial reporting is to present an accurate picture of the true economics of the enterprise, even though the units may be doing business in different ways and employing different instruments and strategies. Accounting principles are the means to that end,” says Talbott.


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