Decoding the Standards

How should a major financial institution implement an intricate new accounting standard? Thats the kind of question that faces CPA Diane M. Butterfield, comanager of corporate accounting policies at The Chase Manhattan Bank in New York, on a regular basis. Her job is to provide financial accounting and reporting advice, primarily for the banks global wholesale worldwide operations, which include investment banking, loan syndication, trading, venture capital, mutual funds and private banking. To develop accounting policies for her portion of the banks businesses, she begins by keeping a close watch on the standards under consideration at the Financial Accounting Standards Board and its emerging issues task force and at the American Institute of CPAs, as well as on the positions of the Securities and Exchange Commission.

FASB Statement 125

In the last year, she focused much of her attention on the banks implementation of FASB Statement no. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The statement, which clarifies and in some cases changes the distinctions between secured borrowings and sales, is so challenging that the implementation appendix, at 30 pages, is twice the size of the statement itself.

Some of the main issues for Chase involved repurchase agreements (repos) and reverse repurchase agreements, which generally are short-lived borrowings commonly used by banks in their financing arrangements. Central to these transactions is the promise to repurchase an asset by a certain date, which raises accounting issues surrounding whether they are secured borrowings or salesissues that Statement no. 125 attempts to resolve. The banks trading partners in these transactions are generally large investment houses, such as Goldman Sachs and Salomon Brothers. Butterfield, a member of the AICPA banking and savings institutions committee, has been attempting to ensure that the contracts the bank enters into with other financial institutions when it uses these agreements satisfy the new standards.

With most projects, whether they involve the implementation of a complex standard such as Statement no. 125 or the launch of a new product, Butterfield must consider whether the existing computer systems can handle the associated detailsand how they will do it. When new disclosures are required, for example, I work with the systems people and with our corporate reporting people to decide whether the information can be accumulated now or whether the systems must be modified. Because Butterfield and her staff arent computer experts, we dont solve the issues, but we raise them. We sometimes play devils advocate, asking, Is this the best way to do it?

The main goals are trying to keep everything as simple as possible. We consider the technical issues, the operational issues and the control environment. With Statement no. 125, we have been working to identify which contracts have substitution language and margin requirements, because those will affect the accounting and reporting.

For this statement, we had to amend our computer systems worldwide, she says. Although our primary markets are in the United States and London, we do have repo and reverse repo activity throughout the world. As a result, the bank had to understand the repo and reverse repo market in all locations around the world in order to make the proper adjustments to meet the new standard. They all operate a little differently and are affected by different laws, Butterfield reports.

Another implementation question revolved around the new rules contained in Statement no. 125 for qualified special-purpose entities. The bank may create extremely complicated transactions to accommodate a particular customers needs and, says Butterfield, many of these have the features of a special-purpose entity or a special-purpose trust. We always reviewed such transactions for consolidation issues, but then along comes Statement no. 125, which puts into place new rules, and in some cases it is not entirely clear how the rules should be implemented. We have to determine what our position on implementation will be and what the regulators are saying. We have to stay plugged into whats being discussed at the EITF and elsewhere. We have to consider what level of legal opinion is needed to support possible positions.

Another new wrinkle is in the treatment of loan participations. Before Statement no. 125, everyone felt they were sales, but the statement added new considerations. For example, if you have a loan participation, you have to be sure that its bankruptcy remote. In other words, if a bank sells a loan participation and then goes bankrupt, would the receiver of the bank be able to pull back the assets involved in the participation to satisfy the creditors of the bank? In the United States, the laws are clear and we can get a very clear legal opinion saying thats not going to happen. In certain other countries, getting a clear opinion is very problematic. We are trying to work with our legal people to see if there is another way to restructure those transactions, but theres no easy answer.

Use Your Resources

Statement no. 125 is like an onion, the CPA says. You think you understand it, but when you peel back a layer, there are more issues. At each layer, you end up asking more questions and gaining new understandings.

Because Chase relies on Butterfield to gain insights into implementation, she seeks to learn as much as possible about the subtleties of different standards. Besides keeping up with the standard setters and their opinions, she also looks to her peers in the banking community for information and advice. For example, the New York Clearing House, an association that provides its members with clearing facilities and has various committees to promote views on numerous banking issues, is an important resource for Butterfield. The Clearing Houses financial reporting committee formed a separate task force on Statement no. 125. It provided a vehicle for us to sit around a table with representatives of other large financial institutions and say, We have this issue. We think this is how were going to approach it. What are you doing? We can discuss questions with other large banks that have very competent staffs and are facing the same issues. Clearing House members can participate in a task force not only for Statement no. 125 but also for every new standard with complicated implementation issues. Its a very useful resource for us.

Another valued asset is her staff. We have a team of highly competent professionals. We have been diligent in making the best hiring decisions. We try to look for people with public accounting experience, because it provides the experience of working with a lot of companies. Butterfield asks her staff to approach problems as a detective would, looking at every angle and its many possible meanings. As a result, an important hiring criterion is problem-solving ability.

But how do you figure out if someone has that in an hour-long interview? she asks. Our approach is to have at least three or four people talk to each candidate. Some people are better at interviewing or they will ask a question in a slightly different way. We try to ask candidates a question they may have practiced, but ask it in a different way, and then probe further. For example, some people ask, Tell me about your strengths. Another way to ask the question is: Describe for me a key project you worked on and the skills you exhibited in completing it. Or if they come up with two examples of something theyve done, we ask them for a third. Then we all sit together and share our impressions. It really takes a number of people to make an assessment of whether a person is right.

The corporate accounting policies department has a staff of 30. Butterfield, who reports to Executive Vice-President and Controller Joseph Sclafani, oversees 15 of them, while the other half report to her comanager, David Morris, who covers the banks regional and national consumer business.

Reach Out

Butterfields experience demonstrates that even the most well-informed executives at the largest corporations can gain valuable help from colleagues within and outside their organizations. Get to know your peers who are also dealing with the same issues, she advises. I feel very comfortable picking up the phone and talking to the head of corporate accounting policies at, say, the Bank of America, Citibank, Morgan or Wells Fargo. She also advises against overlooking assets that are closer to home. I think people tend to underuse their internal resources. We should get accustomed to walking down the hall to pick peoples brains, whether theyre in our own or other departments. Most organizations, small or large, have many talented people. Even in a small organization, its a good idea to seek ideas from your colleagues.